India's Welfare Boom Tests Fiscal Prudence

India’s welfare state is undergoing one of its most significant transformations since economic liberalisation. For decades, public support revolved around subsidising essentials such as food, fuel and fertilisers. Today, that model is steadily giving way to Direct Benefit Transfers (DBTs), with cash replacing commodities and citizens gaining greater freedom to decide how best to meet their own needs. The rise of Unconditional Cash Transfers (UCTs), particularly those directed at women, marks the latest stage of this evolution. While these schemes have proved effective in reducing poverty and expanding financial inclusion, they also raise difficult questions about fiscal sustainability, labour market incentives and the long-term role of the welfare state.

Franklin D. Roosevelt once observed that “the test of our progress is not whether we add more to the abundance of those who have much, but whether we provide enough for those who have little.” That principle remains relevant today. Yet in modern welfare systems, the challenge is no longer simply how much governments spend, but whether public money is directed in ways that empower citizens without undermining fiscal discipline.

Remarkable Transformation

India’s welfare system has undergone a remarkable transformation since independence. Initially, the Public Distribution System supplied subsidized cereals to poor households, later complemented by schemes like MGNREGA for rural employment and subsidies on LPG and fertilizers. While these programs curbed extreme poverty, they suffered from leakages, corruption, and poor targeting. NSS data from 2004–05 showed only 41 percent of subsidized grains reached the poor. Pivotal moment came in 2013 with DBT, enabled by the JAM Trinity, Jan Dhan accounts, Aadhaar, and Mobile connectivity. By channelling funds directly into verified accounts, DBT eliminated middlemen, reduced fraud, and saved nearly Rs. 3.48 trillion over the past decade. Efficiency improved dramatically, with the Welfare Efficiency Index rising from 0.32 in 2014 to 0.91 in 2026, meaning 91 paise of every rupee reached citizens. Cutting subsidies from 16 percent to 9 percent of spending freed resources for new cash transfer programs, especially targeting women.

Indian states’ decision to direct UCT to women is deliberate and supported by global research and institutions like the World Bank and UN. Studies show women spend more on food, healthcare, and children’s education, creating stronger long-term human capital. This approach not only reduces poverty across generations but also reshapes household dynamics, empowering women, improving autonomy, and challenging patriarchal norms. By targeting women, welfare programs achieve greater developmental impact and foster inclusive, sustainable growth.

More than financial relief, UCT’s reshape lives. Poverty is more than lacking money; it is a cycle of stress and vulnerability. Steady income reduces anxiety, avoids debt, and allows planning. When women manage cash, families benefit through better nutrition, healthcare, and education. Local spending supports small businesses, strengthening communities and resilience in tough times. At the macro level, UCTs act as fiscal stimulus through the Keynesian multiplier, where government spending circulates repeatedly, boosting national income. Women’s spending patterns further amplify positive outcomes. However, the success depends on supply elasticity. Without adequate production capacity, rising demand risks inflation and undermining welfare gains.

As the DBT infrastructure matured and political economies recognized the electoral and developmental potency of direct income support, state governments initiated a wave of UCT programs. By the fiscal year 2025-26, more than 15 Indian states had introduced UCT programs for women, covering nearly 12 crore beneficiaries with an aggregate estimated annual fiscal commitment of approximately Rs 1.7 trillion.

The Economic Advisory Council to the Prime Minister (EAC-PM) recently released a working paper on UCTs, analysing Maharashtra’s Mukhyamantri Majhi Ladki Bahin Yojana and Odisha’s Subhadra Yojana. Using anonymized banking data and econometric methods, the study found significant welfare gains. Maharashtra provides women Rs. 1,500 monthly, while Odisha offers Rs. 10,000 annually in two instalments. Beneficiaries increased both spending and savings, enhancing resilience. The Marginal Propensity to Consume was 0.90, showing that 90 percent of transfers were injected back into the economy. Older women saved more, while less-educated women prioritized children’s education. Transfers also reshaped household dynamics, reducing reliance on male earners, and promoted digital inclusion, with rising use of UPI and formal banking for healthcare, education, and essential needs.

While UCTs deliver undeniable micro and macro benefits, the fiscal reality signals strain. Recurring transfers must ultimately be financed through taxation, expenditure switching, or public debt. The consolidated outlay of UCT’s of Rs. 1.7 trillion is almost double the Centre’s allocation of Rs. 86,000 crore for MGNREGA. Such rising commitments highlight the tension between immediate welfare gains and long-term fiscal sustainability.

Debt Sustainability

RBI’s 2024–25 state budget review issued a strong warning on debt sustainability. Although states have kept fiscal deficits within the 3 percent FRBM limit, combined debt is projected at 27.5–29.2 percent of GDP by 2025–26, far above the 20 percent target. Rising subsidies, freebies, and cash transfers strain finances, with committed expenditures like salaries, pensions, and interest already consuming 62 percent of revenues. Reliance on borrowing crowds out private investment, turning welfare spending into fiscal vulnerability. The RBI stressed that without stronger revenue generation and structural reforms, states risk entering a cycle of unsustainable debt, reduced fiscal autonomy, and heightened exposure to shocks. In short, today’s populist spending, if unfunded, becomes tomorrow’s economic fragility.

India’s fiscal challenge lies in balancing welfare spending with capital investment. Welfare programs like cash transfers, food distribution, wage security deliver short-term relief and poverty reduction. Capital expenditure, however, builds highways, schools, hospitals, and digital infrastructure, driving long-term growth and productivity. When states lock large portions of budgets into recurring transfers, they reduce space for development spending. Research shows capital investment yields a multiplier of 2.5–3.5x, creating jobs and expanding capacity, while welfare transfers deliver only 0.9–1.2x. Prioritizing consumption handouts over asset creation risks mortgaging future growth and industrial capacity, leaving later generations to bear the burden of today’s choices.

Electoral Populism

India’s fiscal stability faces mounting pressure from electoral populism. UCTs are often rolled out around elections, offering immediate, visible benefits that translate into votes, unlike infrastructure projects that take decades to yield results. This fosters a ‘revdi culture,’ where parties compete with freebies, risking dependency and undermining long-term growth. Welfare without links to skill-building, productivity, or exit strategies traps citizens in subsistence, weakens fiscal health, and mortgages future prosperity for short-term gains. Implementation flaws further erode credibility. In Maharashtra, audits revealed 14,000 men fraudulently enrolled and 25 lakh ineligible women receiving benefits, costing the exchequer Rs. 5,000 crores. With no serious recovery efforts, such misuse highlights how welfare schemes are exploited for political advantage rather than national interest.

The expansion of UCT’s has reignited debate on a national Universal Basic Income (UBI). UBI is a guaranteed, regular income provided to all citizens, regardless of employment or wealth. The 2016–17 Economic Survey outlined its three pillars: universality, unconditionality, and agency. It argued UBI could reduce poverty, provide income security, and encourage risk-taking. Yet, fiscal costs remain a daunting 4–5 percent of the GDP, even if targeted to 75 percent of citizens. Implementing UBI would require dismantling all existing subsidies which is unlikely and risks inflation. For now, targeted transfers remain India’s practical welfare path.

UCT’s must serve as ladders out of poverty, not permanent crutches that strain public finances. India’s challenge lies in balancing welfare with fiscal discipline. As highlighted by the EAC-PM, the path forward requires a calibrated framework. First, evolve UCTs into “Cash Plus” models that integrate digital literacy, skill training, and SHG linkages. Second, design outcome-based programs that tie transfers to education or nutrition milestones. Third, enforce fiscal rationalization by adhering to FRBM debt limits and using JAM data to exclude ineligible beneficiaries. As India aspires to become a developed economy by 2047, welfare and growth must complement each other. Success will not be measured by the size of monthly transfers, but by whether they help beneficiaries build sustainable, independent lives beyond reliance on welfare.

(The writer is a Chartered Accountant with a leading company in Mumbai. Views personal.)