| Relevance: GS Paper II (Federal Structure, Welfare Schemes); GS Paper III (Government Budgeting, Economy) | Source: Azim Premji University Report / Govt Data 2025-26 |
| A recent handbook titled Realising Rights by Azim Premji University shows this is exactly what is happening in India. The Central government collects the most tax, but when it comes to actually helping poor citizens with schools, hospitals, and social justice, the poorer State governments are carrying the heaviest load. |
1 · The Big Mismatch: Who is paying the bills?
| The GDP Reality Check: In 2025-26, India spent a massive ₹24.20 lakh crore (which is 6.77% of our GDP) on welfare schemes. But who paid for it? The Central government only paid a tiny 1.89%, while the States had to dig deep into their pockets to pay 4.89%. |
The numbers show a very unfair system. Out of their total money, State governments spend over 28% purely on helping people (welfare schemes). In stark contrast, the Centre spends only about 13% of its money on these same things.
Over the last twenty years, the real amount of money spent on social services in India has jumped massively. However, the Centre’s contribution has barely increased. Almost all of this new spending (jumping from ₹2.46 lakh crore to over ₹13 lakh crore) was squeezed out of the already tight State budgets.
2 · Where is the money going? (The Sector Divide)
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Building the Future
School Education
States fund over 75% of government schools. They spend a massive ₹6.83 lakh crore, while the Centre gives only a small fraction (₹0.79 lakh crore).
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Saving Lives
Public Health
Local hospitals and clinics run almost entirely on State money. States spend ₹3.93 lakh crore on health, compared to the Centre’s ₹1.0 lakh crore.
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The New Trend
Direct Cash Transfers
Giving cash directly to citizens is the new trend. States gave a staggering ₹4.14 lakh crore, completely dwarfing Central schemes like PM-KISAN (₹0.64 lakh crore).
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Protecting the Vulnerable
Social Justice
For helping Tribals, Minorities, and backward classes, States spend heavily (₹2.03 lakh crore) compared to a tiny amount (₹0.33 lakh crore) from the Centre.
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3 · Core analysis: Why is the burden increasing?
A. The Shift from Rights to Cash Handouts
Earlier, the government gave people legal “rights” (like the Right to Food or Work). Today, they prefer giving Direct Cash Transfers straight into bank accounts. But data shows that State governments are paying for the vast majority of these cash handouts, leaving their local treasuries completely empty.
B. The Shocking New MGNREGA Rule
Historically, under the MGNREGA rural job scheme, the Centre paid 90% of the cost. But a new law called the Viksit Bharat–Guarantee for Rozgar and Ajeevika Mission (VB-GRAM G Act, 2025) replaced it. From July 2026, this new law forces States to pay a huge 40% of the cost (a 60:40 Centre-State ratio). This sudden change dumps a massive financial burden straight onto State budgets.
4 · Way forward
| The Centre must step up. To truly help the poor, the Central government must spend more of its own tax money on social schemes, instead of quietly passing the bill down to the States. |
| Fairer tax sharing. The ongoing 16th Finance Commission must ensure that a much larger, fairer share of central taxes is given directly back to the States so they can survive. |
| Match Global Standards. India collects taxes just like other developing nations, but we spend far less on social security. The overall money meant for the poor needs to increase. |
| Protect Future Growth. If States spend all their money on daily welfare, they will have nothing left to build roads, bridges, and power plants. Without this infrastructure, future economic growth will stop. |
| Education and health are the real engines of economic growth. But if the Centre keeps forcing States to pay for all this social welfare without giving them enough tax money, our States will go bankrupt. We need a fair system where both the Centre and the States shoulder the burden equally. |
| UPSC Value Box (Simple Definitions) | ||||||||||||
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| Mains Practice Question |
| “While the Central Government collects most of the taxes, State governments carry the heavy burden of welfare spending.” Explain this problem. How has the shift to direct cash transfers and the new VB-GRAM G Act worsened the financial health of the States? (15 marks · 250 words) |
Introduction — Explain the core problem using the simple 2025-26 data (States pay 4.89% of GDP to welfare vs. Centre’s 1.89%).
Body Part 1 — The Sector Divide: Mention how States spend way more than the Centre on basic needs like School Education (75%), Health, and Social Justice.
Body Part 2 — Policy Shifts: Discuss how huge State-led direct cash transfers are emptying treasuries. Explain how the VB-GRAM G Act (2025) made it worse by changing the funding ratio to 60:40.
Way Forward — Talk about the 16th Finance Commission helping to share taxes fairly, and the need for the Centre to spend more on welfare.
GDP Share (4.89% vs 1.89%) ·
VB-GRAM G Act (2025) ·
60:40 Funding Ratio ·
16th Finance Commission ·
Human Capital ·
Fiscal Deficit
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