Cash Transfers Widening Fiscal Deficits Of State Governments

Chennai: The Economic Survey has cautioned the state governments against unconditional cash transfers, which have steadily risen to Rs 1.7 lakh crore in FY26 and widened their fiscal and revenue deficits. Preserving fiscal space for capital formation will yield more gains in household incomes, labour productivity, and welfare than a steady expansion of open-ended UCTs.

Unconditional cash transfers (UCTs) have expanded rapidly across several States and now form a growing share of state-level welfare spending. The number of states implementing them increased more than fivefold between FY23 and FY26, with around half of these states estimated to be in revenue deficit. Such transfers are in the range of 0.19 per cent to 1.25 per cent of GSDP and 0.68 per cent to 8.26 per cent of the total budgetary expenditures.

Cash transfers account for a significant share of the monthly income of female casual labourers - 11 to 24 per cent, and self-employed workers -11 to 87 per cent, across 7 states. They reportedly account for 40 to 50 per cent of the Monthly Per Capita Consumption Expenditure (MPCE) of at least half of the rural population.

Their rapid scale-up and persistence raise concerns about fiscal sustainability and medium-term growth, particularly when not complemented by investments in employment, skills, and human capital. Reports indicate they adversely affect female labour force participation.

Meanwhile, the combined gross fiscal deficit of states rose from 2.6 per cent of GDP in FY22 to 3.2 per cent in FY25, while the combined revenue deficit increased from 0.4 per cent to 0.7 per cent of GDP, indicating continued borrowing to finance revenue expenditure. Committed expenditures like salaries, pensions, interest payments, and subsidies, absorbed about 62 per cent of States’ revenue receipts in FY24, leaving limited fiscal room.

Between FY19 and FY25, 18 States saw a deterioration in their revenue balances, of which 10 slipped into revenue deficit from revenue surplus, 5 worsened their revenue deficit and managed to stay in revenue surplus despite a deterioration.

Preserving fiscal space for capital formation and human-capital investment yields stronger and more persistent gains in household incomes, labour productivity, and welfare than a steady expansion of open-ended UCTs. While cash or grant-heavy spending can ease near-term constraints, it does not, on its own, create the productivity improvements needed for broad-based income growth.