Consider what the Union Budget 2026-27 actually says when read against itself. The government allocated Rs 1,06,530 crore to health and Rs 1,39,289 crore to education, both record figures, framed as investments in Viksit Bharat.
But the numbers reveal a stark contraction: health spending is only 0.5 per cent of GDP, less than a third of what the Lancet Commission recommends. While education spending sits at 0.6 per cent, six times below the government’s own National Education Policy 2020 target.
The Bain-Dasra India Philanthropy Report (2026) shows a Rs 16-lakh crore social sector funding gap in FY25 that is projected to grow to Rs 18 lakh crore by FY30. Despite public spending already accounting for 95 per cent of India’s total social sector expenditure and the sector growing at 13 per cent annually, the gap keeps widening. Bridging that gulf warrants a rethinking of how public finance and private capital work together, which is not through ad hoc philanthropy, but through measurable, government-backed impact investment.
The real issue is that demand is outpacing supply faster, and no amount of incremental budget allocation can close that gap. This is a structural reality for any middle-income country with a large poor population. Several governments, from the UK and the US to Colombia and Ghana, have turned to outcome-based financing as a solution: private capital takes on the delivery risk upfront, and the government pays only for verified results. India has the fiscal pressure, entrepreneurial capacity, and public infrastructure foundation to pursue this model, but lacks the institutional appetite to try it at scale.
Shifting the risk
The mechanism itself is straightforward: the government identifies a social problem, for example, learning loss in public schools or maternal mortality in a lagging district. Instead of contracting a service provider and paying for activity regardless of what happens, it commits to paying only when measurable outcomes are achieved. Independent evaluators verify results, private investors or philanthropies fund the initial work, and if the programme succeeds, the government pays. If it fails, the investor bears the loss.
The world’s first Social Impact Bond, commissioned in Peterborough, England, in 2010, demonstrated that this model works. The Ministry of Justice funded a reoffending reduction programme, and when reoffending fell 9 per cent against the control group, exceeding the 7.5 per cent target, the government paid and investors received their returns. Since then, more than 300 such bonds have been contracted across 35 countries.
India has experimented with this approach through philanthropic funders rather than government. The Educate Girls Development Impact Bond in Rajasthan, which drew initial capital from UBS Optimus Foundation and outcome funding from the Children’s Investment Fund Foundation, is India’s most-cited case. The Educate Girls DIB exceeded its learning targets by 60 per cent and delivered a 15 per cent investor return. A more recent initiative, the Skill Impact Bond, had trained over 50,000 young Indians by 2023, with 62 per cent female participation, funded by philanthropies such as CIFF and the JSW Foundation and evaluated by Oxford Policy Management.
Notably, the Indian government hasn’t yet positioned itself as the outcome payer: the entity that defines results, commissions delivery, and pays upon verification. Philanthropy is currently filling the gap the state hasn’t occupied.
The fiscal case for making that shift is direct. When the government pays a contractor for activity, it carries all the risk of the activity delivering nothing. When it commissions an outcomes contract, the delivery risk sits with the investor. For a country spending just 0.5 per cent of GDP on health, shifting risk to private capital is not ideological, it is prudent.
India’s social sector spending has grown to Rs 27 lakh crore annually, but demand is outpacing supply by roughly Rs 16 lakh crore, a gap equivalent to 60 per cent of the entire Union Budget. Private philanthropy is expanding at only 7-9 per cent yearly, far below the 25 per cent growth rate needed to prevent the shortfall from widening.
Also read: Gold prices are falling during war. It’s a clear sign that real economic shock is coming
Structural barriers
Impact investment offers a different lever. Nearly $5 billion flowed into impact-driven enterprises in 2024, and most Indian impact investors are achieving above-market returns, so capital isn’t the constraint. What’s missing is a government-backed demand signal that would trigger institutional money at scale.
Three structural barriers prevent this from happening: First, India has no regulatory category for impact funds or outcome-based contracts. There is no standardised legal pathway, no tax treatment, and no procurement framework that allows a state government to commission a Social Impact Bond with the same ease that it signs a conventional service contract. Until the regulatory architecture exists, every transaction is a bespoke negotiation.
Second, impact measurement is fragmented across the country. India lacks common metrics, credible public baseline data, and independent verification infrastructure. The Educate Girls DIB worked in part because IDinsight, a rigorous independent evaluator, stood behind every outcome figure. That capacity needs to exist at the district level across the country, not just in a handful of philanthropically funded pilots.
Third, capital clusters in wealthy states like Maharashtra and Karnataka, while lagging regions with the deepest development needs, such as Jharkhand, Odisha, and Bihar, remain starved of investment. Government as outcome funder is the only actor that can credibly redirect financing toward places the market would otherwise skip.
India entered the 2020s amid a once-in-a-century health shock and a severe economic slowdown. It now stands at the cusp of a different inflection point: whether it can convert rising social ambition into real gains in human development, especially for those left behind by high-growth decades. The National Health Mission and Samagra Shiksha already operate in precisely the sectors, and largely the geographies, where outcomes-based contracting would have the greatest effect.
Impact investment will not be a panacea. But if aligned with public purpose and democratic accountability, it could become one of the most important financial tools in India’s journey from an emerging economy to an inclusive, developed nation.
Arijit Dash and Soniya Gupta-Rawal are PhD scholars at the University of Cambridge, UK. Shivam Rawal is a Fulbright Master’s scholar from Columbia University, US. Views are personal.
(Edited by Aamaan Alam Khan)