Marking a decade-long stagnation in government spending on education, the 16th Finance Commission (FC-16) warned that education spending remained on a “relatively stable trajectory”, stuck at around 2.5% of gross domestic product (GDP) in the last decade from 2011-12 and committed to 2011-12 to 203-2020. Reduced “discretionary spending space” for states to invest in human capital.
For representational purposes only. (Getty Images/iStockphoto)The commission urged states to review their spending priorities to protect growth-enhancing sectors like education from fiscal contraction amid rising subsidies and committed spending on pensions and salaries.
Union Finance Minister Nirmala Sitharaman presented the report of the 16th Finance Commission 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 was 2.2% of GDP, down from a Covid-19 pandemic-era peak of 2.5% in 2020-21, according to audited state finance estimates cited by the commission.
An analysis of the budgets and financial accounts of 21 major states by the commission showed that the total expenditure on subsidies increased from 2.2% of their gross state domestic product (GSDP) in 2018-19 to 2.7% in 2023-24. almost ₹5.6 lakh crore in subsidies in 2023-24, with almost half going to the power sector (34.2%) and social security pensions (15.5%).
“In 2023-24, states have spent ₹72,286 crore in health and education subsidies, primarily through free distribution of inputs such as scholarship schemes, uniforms, subsidized insurance premiums and medical expenses. At 9.5%, health and education subsidies account for a relatively small proportion of total subsidies in 2023-24. This suggests that non-merit products account for a disproportionately large amount of state subsidies,” the report said.
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A snapshot comparison of the Commission’s subsidy structure shows that the share of agricultural subsidies has grown rapidly from 4.8% in 2018-19 to 15.6% in 2025-26, largely driven by the cash transfer program under Pradhan Mantri Kishan Samman Nidhi (PNISK). 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 spending expanded.
Noting that once implemented, the subsidy or transfer scheme remains in place indefinitely, the commission said it “reduces already limited space for other expenditures, including infrastructure, health, education and law and order.”
The commission says that subsidies “have a legitimate role in the redistribution and provision of public goods or private goods with large positive externalities”, but warns that “the imperatives of political prudence cannot be ignored”, especially as increasing subsidy commitments put pressure on state finances.
“Borrowing to cover expenditure on subsidy and transfer schemes is not sound fiscal policy. The recent acceleration in the growth of subsidies and transfers needs to be reversed,” the commission said, adding that states “review and rationalize their schemes of subsidy and retain only those schemes that effectively target the poor.”
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 said in the Rajya Sabha that the budgetary 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. The Chief Minister, however, said a comprehensive assessment of education expenditure must include the expenditure of all Union Ministries and Departments as well as all States and Union Territories. Referring to the ‘Analysis of Budgeted Expenditure on Education (2019-20 to 2021-22)’, he said total education expenditure was 4.12% of GDP in 2021-22.
The National Education Policy 2020 mandates public investment in education by the Center and states to reach 6% of GDP.
Education expenditure needs to be scrutinized more closely beyond average state-level figures, says educationist Anita Rampal, a former faculty member at Delhi University’s Faculty of Education. “States like Kerala and Tamil Nadu have performed well in education and made adequate state provision, but last year they were unfairly deprived of central fund allocation for school education. So we need to ask why states are not getting their adequate and fair funds from the union fund pool,” he said.
