Public Health Expenditure, Governance Quality, and Infant Mortality in Indian States: A Dynamic Panel Analysis

Abstract

India has achieved a substantial reduction in infant mortality over the past three decades, yet the pace of decline has been strikingly uneven across states, and public spending on health has remained close to one per cent of gross domestic product against a National Health Policy target of 2.5 per cent. Whether additional public health expenditure translates into improved child survival, and whether the translation depends on the administrative capacity of the spending state, is a question of direct fiscal consequence. Drawing on an unbalanced panel of twenty-one major Indian states over the financial years 1995–96 to 2022–23, this paper estimates the elasticity of the infant mortality rate with respect to real per capita public health expenditure within a dynamic panel framework. Because health outcomes are a slowly adjusting stock and because budget allocations respond to observed health deficits, the specification includes a lagged dependent variable and is estimated by two-step system generalised method of moments (Arellano & Bover, 1995; Blundell & Bond, 1998) with Windmeijer-corrected standard errors, a collapsed instrument matrix, and expenditure treated as endogenous. Results indicate a short-run elasticity of approximately −0.15 and a long-run elasticity of approximately −0.38 at mean governance quality. The effect is strongly conditional on administrative capacity: in the lowest tercile of the constructed governance index the elasticity is small and statistically indistinguishable from zero, while in the highest tercile it approaches −0.25. Elasticities are roughly twice as large in the Empowered Action Group states as elsewhere, and markedly weaker for neonatal than for post-neonatal mortality. Estimates satisfy the Arellano–Bond AR(2) and Hansen over-identification criteria and survive alternative instrument configurations, alternative outcome measures, and the exclusion of the pandemic years. The findings suggest that fiscal expansion alone is an incomplete instrument: the return to the health rupee is governed by the administrative machinery that spends it.