Budgetary subsidies in the health sector in Gujarat are estimated by following the methodology of the White Paper on Subsidies in India (1997). It includes both the explicit and implicit subsidies for the merit and non-merit sub-sectors in the state. These subsidies are estimated for the recent years 1995-96 to 1999-2000. The cost recovery rates in the health sector are also estimated and compared to the major states in the country. Gujarat's case is comparable to other major states in the health sector. Implicit subsidies are more dominant than the explicit subsidies in this sector. Very low cost recovery rates in the sector are associated with serious problems in the public provision of healthcare services in the state. After briefly discussing some of these problems, required reforms in this sector are suggested.