Education expenditure stuck at 2.5% of GDP amid rising subsidies: 16th Finance Commission

FLagging a decade-long stagnancy in public outlay on training, the 16th Finance direction (FC-16) has warned that training expenditure has remained on a “relatively stable trajectory”, stuck at around 2.5% of gross domestic product (GDP) over the last decade from 2011-12 to 2023-24, as rising subsidies and committed expenditures have reduced states’ “discretionary spending space” for investment in human capital.The commission has called on states to review their spending priorities to protect growth-enhancing sectors such as education from fiscal compression amid rising subsidies and committed expenditures on pensions and salaries.The report of the 16th Finance Commission was tabled by Union finance minister Nirmala Sitharaman in Parliament on Sunday. In its report, the commission noted that states’ expenditure on education fluctuated narrowly between 2.2% and 2.5% of GDP from 2011-12 to 2023-24, with no sustained upward shift despite repeated policy commitments to human capital development. In 2023-24, education spending stood at 2.2% of GDP, lower than its Covid-19 pandemic-era peak of 2.5% in 2020-21, according to audited state finance accounts cited by the commission.An analysis of budgets and finance accounts of 21 large states by the commission found that total spending on subsidies rose from 2.2% of their gross state domestic product (GSDP) in 2018-19 to 2.7% in 2023-24. Of the nearly ₹5.6 lakh crore spent on subsidies in 2023-24, almost half went to the power sector (34.2%) and social security pensions (15.5%).“In 2023-24, states spent ₹72,286 crore on health and education subsidies, primarily through scholarship schemes, the free distribution of inputs such as uniforms, subsidised insurance premiums and treatment costs. At 9.5%, health and education subsidies accounted for a relatively small proportion of the total subsidies in 2023-24. This suggests that non-merit goods account for a disproportionately large volume of state subsidies,” the report said.A snapshot comparison of subsidy composition by the commission showed that the share of agriculture subsidies rose sharply from 4.8% in 2018-19 to 15.6% in 2025-26, driven largely by the cash transfer programme under the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) scheme. In contrast, health and education together accounted for 7% of total subsidies in 2018-19, a share that declined to 5% in 2025-26, even as overall subsidy outlays expanded.Stating that once implemented, a subsidy or transfer scheme tends to remain in place indefinitely, the commission said this “reduces the already limited space for other expenditures, including those on infrastructure, health, education and law and order.”The commission said subsidies “have a legitimate role in redistribution and provision of public goods or private goods with large positive externalities”, but cautioned that “imperatives of fiscal prudence cannot be ignored”, especially as rising subsidy commitments strain state finances.“Borrowing for expenditure on schemes of subsidies and transfers is not sound fiscal policy. The recent acceleration in the growth of subsidies and transfers needs to be reversed,” the commission said, recommending that states “review and rationalise their schemes of subsidies and retain only those schemes that target the poor effectively.”It said subsidy schemes involving unconditional transfers and driven by populism “crowd out capital expenditure and other critical expenditures related to the provision of basic services, such as education and health.”In December 2024, Union education minister Dharmendra Pradhan told the Rajya Sabha that budget allocation for the ministry of education in the Union Budget between 2021-22 and 2023-24 remained at 0.4% of the country’s GDP. Pradhan, however, said a comprehensive assessment of education spending must include expenditure by all central ministries and departments, as well as all states and Union Territories. Citing the ‘Analysis of Budgeted Expenditure on Education (2019-20 to 2021-22)’, he said the total education expenditure stood at 4.12% of GDP in 2021-22.The National Education Policy 2020 endorses public investment in education by the Centre and states to reach 6% of GDP.Educationist Anita Rampal, a former faculty member at Delhi University’s faculty of education, said education spending needs closer scrutiny beyond average state-level figures. “States such as Kerala and Tamil Nadu have performed well in education and have made adequate state provisions, but last year they were unfairly deprived of their allocation of central funds for school education. So we need to ask why states are not getting their adequate and rightful funding from the Union fund pool,” she said.