Profligacy alert: Cash transfers mustn’t lead states to fiscal ruin
- A political imperative amid hard times for Indian multitudes could easily turn into a race to the bottom. If cash handouts are inevitable, such schemes need to be studied in depth and designed well—as a permanent universal basic income would have to be.
The Reserve Bank of India (RBI) is known for self-restraint and detachment in what it publishes. It is thus surprising to find that its annual publication, State Finances: A Study of Budgets, unequivocally criticises state governments for their unchecked rise in expenditure on subsidies and cash transfers (primarily to farmers, women and youth).
The central bank’s report was constrained to note: “States need to contain and rationalise their subsidy outgoes, so that such spending does not crowd out more productive expenditure."
The RBI report comes on the heels of another annual study from non-profit PRS Legislative Research, State of State Finances, which observed that nine states had provided a cumulative outlay of about ₹1 trillion in their budgets for 2024-25 for unconditional cash transfers to women; however, the final spending at year-end under this head is expected to shoot past ₹1.5 trillion, with many additional states, especially poll-bound ones, promising similar schemes outside their budget.
Notably, these cash transfers are agnostic of the political shade of the state government in power.
Also read: Data dive: How freebies are hurting already stressed state finances
Two defining features stand out in these ever-rising volumes. One, the political imperative of cash transfers as a tool for electoral gains has lured all political parties to this instrument; this is despite warnings from various quarters about the perils of fiscal profligacy, especially the impact on developmental expenditure.
Even the ruling Bharatiya Janata Party, despite the fiscal discipline rhetoric of many members and its criticism of mismanagement by opposition-ruled states, has succumbed to the lure of direct cash transfers. With vote-seekers competing to surpass each other’s schemes, it seems these have become a permanent feature of India’s political arena.
The second characteristic is economic: most political parties have realized that cash transfers are perhaps the best antidote for stagnant-to-declining real wages amid pervasive unemployment, as they help economically weak households maintain their routine consumption.
The impact of income levels under stress has been evident for some time now in weak consumer demand overall. Cash handouts offer a temporary reprieve, apart from yielding political dividends, as seen in the poll results of Maharashtra, Jharkhand and Madhya Pradesh.
Also read: Freebies are not fiscally sustainable but there’s no need to ban them
While the ever-swelling pipeline of cash transfers could lull observers into mistaking them for universal basic income (UBI) schemes, there needs to be a formal study on the structural gaps between the reflexive nature of cash transfers and a permanent UBI policy framework.
A key element missing is means-testing for cash transfers, even though many such schemes for women are expected to exclude government employees and/or those paying income tax.
However, this eligibility check is not uniform across schemes, which run the risk of large-scale fudging of income levels with the connivance of officials at the ground level; in any case, the enrolment of beneficiaries and distribution of resources has always been a fertile ground for corruption.
A second political study is also needed before a race-to-the-bottom with cash transfers upsets India’s fiscal equilibrium and adversely affects its global credit rating.
There is no proof that cash transfers actually translate into votes, nor any study to show what percentage of the outlay yields electoral gains. Political parties need to use an internal-rate-of-return model to temper the indiscriminate use of cash transfers.
Also read: Spare the fisc: Don’t run rings around the budget deficit
topics
