Unconditional Cash Transfers by States: Fiscal Implications and Economic Survey 2025-26 Analysis
The proliferation of unconditional cash transfer schemes by State Governments has become one of the most debated fiscal policy issues in India. The Economic Survey 2025-26 addresses this trend with concern, highlighting potential negative implications for capital expenditure, incentives, and overall fiscal health. This article examines the phenomenon, its drivers, and the economic arguments surrounding it.
The Rise of State-Level Cash Transfer Schemes
Over the past few years, multiple State Governments across the political spectrum have announced cash transfer schemes promising monthly payments to various categories of citizens. These include payments to women, farmers, unemployed youth, and other groups. The amounts range from Rs 1,000 to Rs 2,500 per month, representing significant fiscal commitments.
These schemes differ from conditional cash transfers (like scholarships tied to school attendance or payments linked to health outcomes) in that they require no specific behavior or action from recipients. The transfer is unconditional – eligible citizens receive money simply for being in a qualifying category.
The political attractiveness of such schemes is evident. They provide visible, tangible benefits that voters can directly attribute to the government. Unlike infrastructure investments whose benefits may take years to materialize and are diffuse, cash transfers are immediate and personal.
Economic Survey 2025-26: Three Key Concerns
The Economic Survey 2025-26 raises three interrelated concerns about unconditional cash transfers by States.
1. Crowding Out Capital Expenditure: Every rupee spent on cash transfers is a rupee not available for capital expenditure on roads, power, water supply, healthcare facilities, and education infrastructure. The survey emphasizes that capital expenditure has higher multiplier effects on growth and creates assets that benefit future generations.
When State budgets are constrained, the choice between cash transfers and infrastructure becomes zero-sum. States that allocate 2-3 per cent of GSDP to cash transfers have proportionally less for infrastructure investment. This affects long-term growth prospects because infrastructure deficiencies constrain economic activity.
2. Rising Revenue Deficits: The survey notes rising revenue deficits in several States. Revenue deficit occurs when current revenues are insufficient to cover current (non-capital) expenditure. When States borrow to fund cash transfers (which are current expenditure), they are essentially borrowing to fund consumption rather than investment.
This is fiscally unsustainable in the long run. Borrowing for investment can be justified because the asset created generates future returns. Borrowing for consumption leaves nothing for the future while creating a debt burden that future generations must service.
3. Impact on Self-Improvement Incentives: Perhaps the most profound concern is behavioral. The survey states that "the economic costs of the insidious impact that unconditional fiscal transfers have on the incentives for self-improvement, upskilling, and employability may be more significant in the long term."
This argument draws on economic theory about transfer payments. Unconditional transfers may reduce the incentive to seek employment, acquire skills, or pursue educational opportunities. While the individual amounts may seem small, the aggregate effect on workforce participation and productivity could be substantial.
The Debate: Arguments For and Against
The Economic Survey's critical stance represents one side of a contested debate. Proponents of cash transfers offer counter-arguments:
Targeting Efficiency: Cash transfers can be more efficient than subsidized service delivery because they eliminate leakages and middlemen. The money reaches beneficiaries directly rather than being lost in bureaucratic implementation.
Consumption Support: For genuinely poor households, cash transfers provide crucial consumption support. They can choose how to spend based on their specific needs rather than receiving standardized benefits.
Women's Empowerment: Cash transfers to women can enhance their financial autonomy and bargaining power within households, potentially improving family welfare outcomes.
Demand Stimulus: In times of economic weakness, cash transfers can stimulate consumer demand, supporting economic activity.
However, the survey's concerns focus specifically on unconditional and universal transfers that go beyond poverty alleviation to become general fiscal benefits. The distinction between targeted poverty support and broad-based fiscal populism is important.
Impact on General Government Finances
The Economic Survey 2025-26 makes an important point about how State fiscal health affects the entire country. With Indian government bonds included in global indices, international investors assess general-government finances – combining Union and State fiscal positions.
This means that fiscal indiscipline at the State level raises borrowing costs for the Union Government as well. The survey notes that India's bond yields are higher than Indonesia's despite identical credit ratings, suggesting that State fiscal concerns may be a contributing factor.
In this context, State cash transfer schemes are not just a local fiscal choice – they impose costs on the national economy through higher interest rates.
Alternative Approaches: Conditional Transfers
The economic literature generally favors conditional cash transfers over unconditional ones. Conditional transfers tie payments to specific behaviors – sending children to school, getting health checkups, completing skill training courses, etc.
Such conditionality achieves multiple objectives: providing income support while encouraging human capital investment. Programs like Brazil's Bolsa FamÃlia have demonstrated that well-designed conditional transfers can reduce poverty while improving education and health outcomes.
India's own Jan Dhan-Aadhaar-Mobile (JAM) infrastructure provides the capability for sophisticated conditional transfer programs. The technology exists; the policy choice is about whether to use it for conditional or unconditional transfers.
Fiscal Responsibility at State Level
Most States have enacted Fiscal Responsibility legislation mirroring the Union's FRBM Act. However, enforcement has been weak. States have found ways to circumvent debt limits through off-budget borrowings, power sector subsidies, and accounting adjustments.
The survey's discussion suggests the need for strengthening fiscal responsibility frameworks at the State level. This could include more stringent disclosure requirements, limits on revenue deficits, and consequences for fiscal slippage.
The 16th Finance Commission may need to address these issues in its recommendations, potentially linking transfer amounts to fiscal discipline measures.
UPSC Relevance: Fiscal Policy and Welfare Economics
This topic connects multiple UPSC syllabus areas:
- Public Finance: Government expenditure composition, fiscal deficits
- Welfare Economics: Transfer payments, poverty alleviation
- Political Science: Fiscal federalism, competitive populism
- Ethics: Intergenerational equity, fiscal responsibility
Practice MCQs on Cash Transfers - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, unconditional cash transfers by States can crowd out:
(a) Tax revenue
(b) Capital expenditure
(c) Central transfers
(d) Foreign investment
Answer: (b) Capital expenditure
Q2. Revenue deficit indicates that:
(a) Total revenue exceeds total expenditure
(b) Current revenue is insufficient to cover current expenditure
(c) Capital revenue exceeds capital expenditure
(d) Tax revenue is declining
Answer: (b) Current revenue is insufficient to cover current expenditure
Q3. According to Economic Survey 2025-26, which long-term concern is associated with unconditional transfers?
(a) Higher inflation
(b) Currency depreciation
(c) Reduced incentives for self-improvement
(d) Lower tax compliance
Answer: (c) Reduced incentives for self-improvement and employability
Q4. Conditional cash transfers differ from unconditional transfers in that they:
(a) Are paid in kind
(b) Require specific behavior from recipients
(c) Are funded by Union Government
(d) Are limited to urban areas
Answer: (b) Require specific behavior like school attendance or health checkups
Q5. State fiscal indiscipline affects national borrowing costs because:
(a) States borrow from RBI
(b) Union guarantees all State debt
(c) Investors assess general-government finances
(d) Interest rates are uniform nationwide
Answer: (c) International investors assess general-government finances
Conclusion
The Economic Survey 2025-26's critical assessment of unconditional cash transfers by States highlights a growing fiscal challenge. While providing immediate benefits to recipients, these schemes raise concerns about long-term fiscal sustainability, infrastructure investment, and labor force incentives. The survey's framing suggests a need for States to reconsider the balance between consumption support and investment in productive capacity. As this debate continues, finding the right mix of targeted support for the genuinely needy and investment in future growth will be crucial for India's development trajectory.