http://www.cddep.org/sites/cddep.org/files/publication_files/Deolalikar.Jamison.Laxminarayan.2007.In

the present UPA government has committed to spending 3 percent of GDP on the health sector before its term ends in 2008-09. Assuming that the Indian economy continues to grow at its current rates, 3 percent of the projected GDP (of Rs. 52,000 billion in current prices) will constitute Rs. 1,500 billion.

The budget estimates for 2006-07 call for the central government to spend Rs. 130 billion (including in central grants to states) and for the states to spend roughly Rs. 285 billion. In other words, the commitment of 3 percent of GDP to health spending would call for a quadrupling or quintupling of what the central and state governments currently spend on health. Given that the share of the central government in public health spending is only 20-35 percent (depending upon whether central grants to states are included or not), even an increase of 30-50 percent per annum in central government health expenditure over the next few years will not allow a realization of the CMP goal. However, as is discussed subsequently in the paper, there is a recent precedent in India’s education sector of the central government assuming a much larger share, relative to the states, of public spending to achieve its priorities.

B.State-Level Variations in Health Spending Data from the National Health Accounts 2001-02 show wide variations in health spending per capita across states (Figure 10). Kerala has the highest annual per capita spending on health (Rs. 1,858), followed by Haryana, Punjab, and Himachal Pradesh. At the other end, Assam, Orissa, and Rajasthan have the lowest levels of health expenditure per capita. Figure 10 also shows the share of private spending in total health spending across states. With the exception of Sikkim, private spending accounts for the major portion of health spending in every state. In some states, such as Bihar and Uttar Pradesh, private spending accounts for 90 percent or more of total health spending. Surprisingly, even in Kerala, which has excellent health indicators and a wide network of public health facilities, and Haryana, which is one of the most affluent states in the country, private spending accounts for 90 percent of total health spending.

Figure 11 suggests that there is no systematic pattern in the ratio of public expenditure on health to gross state domestic product (GSDP). Public expenditure on health is low in relation to state income (about 0.6-0.8 percent of GSDP) in relatively affluent states like Haryana and Gujarat as well as in a poor state like Uttar Pradesh. On the other hand, public spending on health accounts for as much as 1.6 percent of GSDP in a very poor state like Bihar.

There is some evidence to suggest that private expenditure on health is greater in states that have relatively low public spending on health (Figure 12). While this inverse relationship could be taken as evidence of the traditional displacement or ‘crowding-out’ effect of public spending, the Indian context is very different and necessitates a different interpretation. As noted earlier, public 7