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1.

Introduction

The health system  finance is the most important challenge for achieving Universal

Health coverage (UHC) in an emerging country like India . The health system of

India as well as many low-income and middle-income countries, suffer lower growth

of government health expenditure associated with higher dependency on out-of-

pocket (OOP) expenditure for obtaining health care services. The idea which was

proposed that these counties should spend at least 15% of total government

expenditure and 5% of Gross Domestic Product (GDP) on public health in order to

provide basic health care service to the people. It is noticed that the public health

expenditure (PHE) as a percentage of GDP of India is 1.4% in 2014 which is 1%

lesser than the low-income countries average health expenditure, while the PHE as

a percentage of total government expenditure is 5% in 2014 which is 4.7% lesser

than the average figure of low-income countries . Similarly, 62% of health

expenditure is from OOP in India and that figure is even higher than the other low-

income and middle-income countries such as Pakistan (56%), Indonesia (47%), Sri

Lank (42%), Kenya (26%), and Bhutan (25%).

The pertinent factor for the slower growth of public expenditure on health care is due

to less fiscal space in these economies. Fiscal space of a country refers to the

government’s ability and willingness to mobilize public revenues, which allows the

government to spend resources on public services such as health care. Further, the

“IMF-World Bank Spring Meeting-July 2016 and the “Addis Ababa Summit-July

2015”  have declared domestic revenue mobilization  as one of the most powerful

ways to increase fiscal space for the health sector. The generation of fiscal space is

essential for the health sector because, the greater the fiscal space of a country, the
greater the potential for public expenditure on health. Also, greater public

expenditure on health is associated with lower dependence on OOP expenditure for

health care services, and consequently a lower financial burden on poor households.

The fiscal space for health is influenced by the conducive macroeconomic

environment such as sustained economic growth, higher mobilization of

revenue, lower debt burden, and maintenance of fiscal balance. These

macroeconomic factors are not independent of each other and they affect the

growth of PHE in different channels. For instance, lower revenue generation

creates a fiscal deficit (when current expenditure exceeds current tax

revenue), thereby borrowings increase in order to finance the deficit. If the

debt increases over a longer period of time, for the repayment of debt

services, the government can squeeze the resources available to finance the

developmental expenditure. Again, the high level of debt stock compels the

government to adopt distortionary measures such as inflation tax for repaying

the interest payments. Also, higher levels of inflation, are linked with

macroeconomic instability due to fall in demand for money and decline in the

tax revenue. As a result of the decline in government revenue, it would limit

the fiscal space of the government and restrain any scheme to finance

developmental activities. The impact assessment of macroeconomic policies

on PHE is more relevant in the context of Indian states for the period 1990–

2014 for the following reasons.

 First, the provision of medical and public health services and allocation

of the health budget is the primary responsibility of the state


government of India. But the majority of the Indian states suffers from

lower fiscal space and low prioritization of the health budget.

  Second, there is a consistent slower rate of growth in PHE of the

majority of Indian states, resulting in higher OOP expenditure, and poor

health care service.

 Third, there is a continuous increase of fiscal gap (current expenditure

minus current revenue) among the states of India, which has led to the

high fiscal deficit and a large debt stock. These create fiscal stress and

consequently reduce the state’s fiscal capacity to release finance for

health sector.

 Fourth, various health reforms have been initiated in India since

economic reforms, namely National Health Policy—2002, National

Rural Health Mission (NRHM)—2005, Rashtriya Swasthya Bima

Yojana health insurance scheme—2008, and High-Level Expert Group

—2010 for the improvement of the health system.

Result shows that state’s own revenue (i.e. tax revenue and indirect

tax) and central government transfer (i.e. tax devolution) are the major

public providers for financing the health care of Indian states. The

result suggests policy implication for the generation of fiscal space

toward health care across Indian states by improving revenue

collection, enhancing tax base, and the judicious spending of central


government transfer devolution in order to achieve universal health

care finance.

 The impact of macroeconomic factors (i.e. economic growth,

domestic revenue, domestic debt, fiscal balance, tax devolution,

and central grants) on the growth of public health expenditure in

assessing fiscal space for health in the 15 major states of India

for the period 1990–2014.

 The cointegration results show that there is a long-run

association between the changes of public health expenditure

and changes of macroeconomic factors in the Indian economy.

The regression coefficient result shows that state’s revenue

capacity (tax revenue and indirect tax) and central government

fiscal transfer (tax devolution) are major public providers for

financing health care of Indian states. While, other sources of

revenue of the state government, namely non-tax revenue and

direct tax shows no impact on public health expenditure in the

short run, it shows positive impact on the growth of public health

expenditure in the long run. We find the positive and significant

impact of major macroeconomic factors (i.e. domestic debt, per

capita GSDP, and fiscal balance) on the growth of public health

expenditure in the long run, while it shows negligible impact on

public health expenditure in the short run.


 From the analysis of public health expenditure and

macroeconomic policies, we observed that the various fiscal

policy initiatives such as tax reform, fiscal management reform,

national health policy, and improvement of central transfer during

the fiscal deterioration period (1991–2003) have positively

influenced the state-level fiscal capacity by raising tax revenue

and improved fiscal balance during 2005–2014. Despite the

conducive macroeconomic environment since 2005, there is a

huge disparity among the states of India in the share of public

health expenditure with respect to macroeconomic factors and

only marginal improvement has been seen in the growth of public

health expenditure. The study has suggested the following fiscal

policy measures for the generation of fiscal space for health in

order to achieve UHC. First, increase the fiscal capacity of states

by raising domestic tax revenue collection and widening the tax

base. Second, generate more direct tax revenue by the

formalization of the unorganized sector and indirect tax revenue

through the effective implementation GST reform. Third, utilize

the central government transfer (tax devolution and central

grants) by the respective state governments of India effectively.

Fourth, offer higher prioritization of health budget in the

respective state government and periodical increment of health

budget with respect to state domestic income. With these


measures, India would achieve the 5% of GDP on public health

expenditure by 2030.

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