Union Budget 2026-27: Fiscal Shift to State-Led Welfare

Context:

The Budget 2026-27 of the Union is an impressive change as its central budgetary allocations are lower in the key welfare schemes with a higher responsibility of expenditure being devolved to the states with the Centre still having the policy control by the norms and laws. This model poses concerns about the fiscal federalism and the ability of the states to provide equitable welfare.

Budget Context

Union Budget 2026-27 focuses on fiscal consolidation with fiscal deficit of the 4.3% of GDP, and higher capital expenditure of 12.2 lakh crore. There is a stable social sector spending as a share of total expenditure, and real-term stagnation, with health and education increasing only 2.3%after inflation adjustment, which is much lower than the 7 percent required to sustain the service. Under-spending is also continuing with revised estimates being lower than budget estimates in different sectors.

Key Dimensions of the 2026-27 Welfare Shift

1. Reduced Direct Central Welfare Spending: There is a tendency in the budget where, even though needs are increasing, the investment in basic welfare areas: health, education, and social security is relatively flat in real terms.

• Marginal Increases: The marginal nominal change in Health and Education allocations showed marginal increases, which after inflation have been in the form of stagnation or decline in real terms.
• Stagnant Schemes: There were increases in key social schemes (National Social Assistance Programme, NSAP, maternal entitlements, SAMARTHYA, and creche facilities, PALNA) in nominal terms, but these did not keep pace with rising demand.
• Under-spending Trend: One of the important trends is the under-spending trends between Revised Estimates (RE) and Budget Estimates (BE) in terms of 2025-26, as it shows that even in terms of money allocated, the funds were not spent completely.

2. Shifting Burden to States (Centrally Sponsored Schemes): he Centre has cut down on the direct spending, however the onus of carrying out welfare schemes has been transferred to the states by:

• Greater Cost-Sharing: States will be expected to contribute greater amount of spending in Centrally Sponsored Schemes (CSS).
• Operational Responsibility: The burden of delivery to urban/rural livelihoods and housing has been firmly shifted on to state machinery with the Centre still having control in terms of norm-setting and legislation.

3. Shift from Social to Physical Infrastructure (Capex): The budget focuses on expenditure in terms of public capital (Capex), which increased to 12.2 lakh crore. This indicates that the Union government is making long term, infrastructure based, investments as opposed to short term, consumption based, social welfare expenditures.

Key Allocation Cuts

Major welfare schemes face sharp reductions, pushing implementation burden to states.

Centralised Authority vs. Decentralised Spending

This budget institutionalises a norm-setting position of the Centre. It is still fueling the national agenda by:

• Legislation and Standards: The Centre establishes national standards and law (e.g. Right to Education, Health Norms) and leaves the question of fiscal space to the States.
• Procedural Control: The economic governance is centralised through regulatory changes such as the New Income Tax Act, 2025 and digitised customs systems at the same time the direct welfare expenditure is reduced.
• Emphasis on Infrastructure: The Centre has given a high value to Capital Expenditure (Capex), which has been increased to 12.2 lakh crore (4.4% of GDP), and in effect, the allocation of long-term assets creating over transfers of social welfare in the short term.

Implications for Fiscal Federalism and Governance

• Fiscal Constraints on States: The change takes place during the period when states have a little revenue autonomy. States are getting around 34 percent of net tax revenues compared to the recommended 41 percent by the 16 th Finance Commission, partly because the Centre has become more dependent on cesses and surcharges.
• Threat of Inequality across the Region: Push strategy presupposes that every state is able to control welfare. This could however be accompanied by unfair welfare outcomes where the financially strong states offer better social services than the rest regarding national equality.
• “Jobless Growth” Concern: The budget is concerned with capex, but this might not immediately help the urgent need of job creation and household purchasing power, which is hampering the last mile reach of the welfare as is the case in recent economic critiques.

Conclusion

The Union Budget 2026-27 is a pivotal document that redefines the Centre-State relationship in welfare delivery. By shifting the responsibility to the states while focusing on capital investments, it aims to create a more efficient, decentralized, and accountable system. However, for this to succeed, it requires strengthening the fiscal capacity of states to handle the added burden, ensuring that “Viksit Bharat” is built not only on strong infrastructure but also on an equitable, inclusive social foundation.

Source: The Hindu

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