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Gross value added output is the sum of all sectoral contributions to the domestic economy. It is synonymous with the gross domestic product or total income. Output fluctuation means the difference between actual output and potential output. In other words, it is called the output gap. When the output gap is positive that means actual output is greater than the potential output which is considered a good year (i.e. economic up-turn or boom). On the contrary, when the output gap is negative that means actual output is lesser than the potential output which is considered a bad year (i.e. economic down-turn or recession). Macro-Economics literature coined it as business cycle fluctuation and argues the behavior of fiscal policy of the government in terms of revenue and expenditure management in the economy. There are three types of cyclical patterns usually seen in economies – Pro-cyclical, counter-cyclical, and acyclical. In pro-cyclical, government expenditure increases in a good year while decreases in a bad year. In counter-cyclical, government expenditure increases in a bad year while a decrease in a good year. Acyclical means there are no relationships between government expenditure and output fluctuations.
Here, I discuss the business cycle fluctuations in India and its response to government health expenditure over the last 40 years. Additionally, this work also discusses the effects of fiscal deficit, state tax revenue, and central government grant on health expenditure. All these factors generate can fiscal space in the economy thereby allocation happens in the health sector. Therefore, exploration of those macro-fiscal parameters is crucial to determine the health sector allocation during the economic recession.
By analyzing the data, this work finds interesting insights. First, the effects of economic growth, revenue, and central government grants are positive for health expenditure in both good years and bad years. It is noticed that the coefficient of output is positive and statistically significant, which implies the pro-cyclicality of public health expenditure. The magnitude of the coefficient lies in the range of 0.31–0.41%, which implies health is a necessity in Indian states. Similar findings are observed for the coefficient of revenue, which shows the pro-cyclicality toward public health expenditure. However, the coefficient range varies between 0.23 and 0.28%, which also confirms health is a necessity. The pro-cyclical behavior of public health expenditure in both ‘upturn’ and ‘downturn’ implies that the public health expenditure shows a symmetric relationship during the period of both economic boom and economic recession in India. It implies that state governments have managed their allocation toward the health budget despite their good and bad times.
The study concludes that economic growth plays a more important role in financing health care. It also finds that central fiscal transfers play a more important role in special category states than the general category states in India. Thus, the government should give more priority to health expenditure in Indian states. Over the past few years, the central government is curtailing its expenditure share on many central-sponsored schemes including health, and states have had to step in for raising spending on the health sector. This study suggests that more focus should be given to the enhancement of the fiscal space for health through revenue mobilization, high economic growth, and smooth flow of central fiscal transfers among Indian states, especially to the special category states.
