Budget | Why social spending is productive investment

Budget 2026-2027 presents a pivotal opportunity. It can move India from a model that prioritises visible hardware to one that invests in durable human capability

The Budget is not mere arithmetic; it is a statement of political intent. The Union Budget 2026-2027 must be judged not only on its fiscal prudence, but on whether it signals a break from a longstanding imbalance, India’s disproportionate investment in physical infrastructure without corresponding attention to the social foundations that sustain it. Roads without reading, power grids without primary care, and broadband without baseline literacy may win headlines, but they do not build a resilient society.

India’s paradox is well documented. Public expenditure on large-scale infrastructure and macro transfers has often co-existed with weak provisioning of essential public goods. The result is underwhelming human development outcomes, regional disparities, and low social returns to growth. Economic history offers cautionary lessons.

First, institutions and distributional legacies matter. Decades of district-level research have shown how historical land-tenure regimes and elite capture of local governance continue to shape access to schools, health services, and safety nets. Second, economic distress, famines, dropouts, malnutrition, are rarely only failures of production. They are frequently failures of policy design, sequencing, and distribution.

This calls for a more integrated fiscal strategy. The dominant debate, fiscal consolidation versus welfare, is a false binary. The real challenge lies in redefining social expenditure not as consumption but as productive investment. Human capital formation, if well-designed and well-delivered, pays long-term economic and social dividends. It improves labour productivity, reduces inequality, and enhances the political legitimacy of State capacity.

Three concrete, fiscally responsible priorities deserve centre stage.

First, outcome-driven primary healthcare must be ring-fenced and revitalised. The National Health Mission should be strengthened by disbursements tied to performance indicators, including primary health centre (PHC) staffing ratios, outpatient coverage per 1,000 population, and reductions in avoidable hospitalisations at the district level. Crucially, health provisioning must be viewed not only as a social obligation, but also as a strategic economic asset. Local manufacture of essential drugs and medical devices should be incentivised to reduce import dependence, while generating employment in pharmaceutical clusters.

Second, foundational learning must be treated as core infrastructure. The education portfolio should designate basic literacy and numeracy as its ‘capital project’, a measurable, resourced objective on par with physical infrastructure. A fixed share of Samagra Shiksha funds must be explicitly allocated to foundational learning, with outcomes monitored via district dashboards. Digital inclusion must also be reconceived. Devices are not ornamental add-ons, but essential complements. Public procurement of devices for the poorest districts and affordable access schemes can help prevent the deepening of a digital divide that mirrors and compounds existing inequalities.

Third, skills development must shift from inputs to outcomes. A ‘Skills Outcomes Fund’ should co-finance training only upon verified employment or apprenticeship outcomes. This model, already tested globally, aligns incentives across government, training partners, and employers. Sectoral ‘skill treasuries’, labour market intelligence units housed within industry bodies, can map demand more effectively. Meanwhile, CSR tax incentives should be made conditional on third-party verified impact, nudging private capital toward credible, and scalable interventions.

These measures require no extravagant giveaways. What they demand is a change in fiscal architecture: one that links social spending to measurable returns. That means tighter programme design, sharper output and outcome indicators, district-level fiscal reporting, and robust third-party audits to limit capture. Without such design, even well-intentioned allocations risk being absorbed by local patronage structures or dissipated in inefficient delivery.

Revenue-side reforms can support this reallocation without harming growth. Improved tax administration, rationalisation of exemptions, and a graded CSR incentive structure, all politically feasible, can enhance fiscal space. More importantly, the political economy of taxation must be reframed. Citizens are more likely to accept progressive taxation when they see tangible, and localised public benefits. If PHCs are visibly staffed, if classrooms improve foundational literacy, the case for redistributive revenue mobilisation strengthens.

Budget 2026-2027, thus, presents a pivotal opportunity. It can move India from a model that prioritises visible hardware to one that invests in durable human capability. The latter is not only morally defensible; it is economically essential. Without foundational investments in health, learning, and skills, the dividends from infrastructure will remain thin and uneven. History offers warning and wisdom. Repeated cycles of underinvestment in public goods, especially for the poorest regions and most marginalised communities, have constrained India’s development trajectory and weakened the social compact. A more just growth model requires a new Budget logic: one that sees people not as residual beneficiaries, but as central assets in the growth story.

The Budget that anchors this vision will not merely reduce a deficit. It will renew the Republic’s social contract, one that makes growth both more equitable and more enduring.

Debdulal Thakur is Professor and Dean, Vinayaka Mission’s School of Economics and Public Policy, Chennai.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH)