Public Sector Health Spending in India to See a Boost

The recently announced 2008/2009 Budget for India decrees a 15% increase in Central Government spending towards health and health care. This, along with the 20% increase in spending on education, has been welcomed by many as a positive step towards both acheiving poverty alleviation and sustained future economic growth.

What can we expect from this spending hike? Put a bit differently, what does a 15% increase in health spending actually buy you? Clearly, this is not an easy question to answer statistically: current health care spending is likely correlated with a variety of other characteristics associated with population health. Furthermore, it is not clear that the spending-health relationship is even contemporaneous. After all, investments may take some time to yield dividends.

A recent paper in the journal Health Economics has explored this question in the Indian context for child health (non-gated version here). The author, Sonia Bhalotra, finds the following:

Existing research presents little evidence of an impact [of public expenditures on health] on childhood mortality. Using specifications similar to those in the existing literature, this paper finds a similar result for India, which is that state health spending saves no lives. However, upon allowing lagged effects, controlling in a flexible way for trended unobservables and restricting the sample to rural households, a significant effect of health expenditure on infant mortality emerges, the long run elasticity being about −0.24. There are striking differences in the impact by social group. Slicing the data by gender, birth order, religion, maternal and paternal education and maternal age at birth, I find the weakest effects in the most vulnerable groups (with the exception of a large effect for scheduled tribes).

The identifying assumption in this paper is that, conditional on state fixed effects, state-specific time trends, and controls for total state income, rainfall and other covariates, health expenditures (current and lagged) are uncorrelated with the regression error. A tough sell perhaps, but the paper presents some reasonable robustness checks and has some interesting findings that should be explored further.

Obviously, the question of whether additional health care expenditure buys better health is extremely relevant for the U.S. context. I spoke about the conventional wisdom (i.e., increased spending is wasteful) and recent evidence that casts some doubt on this conclusion in an earlier post.