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This paper critically examines the Conditionalities Framework under India’s National Health Mission (NHM), which marked an important step in performance-based financing for the health sector. Drawing on incentive disbursement data for the period 2019–20 to 2024–25, the analysis finds that the framework has generated only limited effective incentives for states to improve health sector performance. While the Framework has helped signal the Central government’s health priorities and encouraged adoption of system-level reforms in states, its capacity to drive substantive improvements in state-level health outcomes remains constrained. The paper highlights several conceptual and design challenges that weaken the incentive effect of the framework. These include the reliance on relative performance assessment within state groups, which creates a zero-sum incentive structure and dilutes rewards; the inclusion of performance indicators that are not fully within the control of the incentivised state-level NHM apparatus; and the dependence on self-reported performance data, which raises concerns about data credibility and scope for gaming. Strengthening the framework will require revisiting the choice of performance conditionalities, performance assessment cycles, and the mechanisms for performance verification. Surveys like the National Family Health Surveys (NFHS) could be leveraged to reinforce third-party performance validation.

Keywords: Performance Based Financing, Conditionalities Framework, National Health Mission, Health Financing, India