Economic Survey Flags Fiscal Strain on States from Cash Transfers

"With markets pricing government debt on a consolidated basis, persistent revenue deficits or an expansion of committed expenditures at the State level could affect sovereign bond yields."

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By BasisPoint Insight

January 29, 2026 at 8:53 AM IST

The rapid expansion of unconditional cash transfer programmes across states is creating significant fiscal pressures, with implications for infrastructure spending and medium-term economic growth, the Economic Survey 2025–26, tabled in Parliament on Friday, said.

Aggregate state spending on such programmes, particularly schemes targeted at women, is estimated at about ₹1.7 trillion in 2025-26, while the number of states implementing these schemes has increased more than fivefold between 2022-23 and 2025-26. Around half of these states are estimated to be in revenue deficit, the document said.

Citing research, the Survey found such transfers accounted for 0.19-1.25% of GSDP and 0.68-8.26% of total budgetary expenditures, based on state-level studies. Across the seven states examined, unconditional cash transfer made up 11–24% of monthly income for female casual labourers and 11–87% for self-employed women, and 40–50% of monthly per capita consumption expenditure for at least half of the rural population studied.

While cash transfers have provided immediate income support and helped women meet unmet health and personal needs, often viewed as compensation for unpaid contributions to GDP, the Survey warned that the rapid scale-up and persistence of these schemes raise concerns over fiscal sustainability and medium-term growth prospects, particularly when not complemented by investments in employment, skills, and human capital. It added that reports suggest the expansion of unconditional cash transfers may be contributing to lower female labour force participation.

The expansion of schemes has coincided with constrained fiscal space at the state level. The combined gross fiscal deficit of states rose from 2.6% of GDP in 2021-22 to 3.2% in 2024-25, while the combined revenue deficit increased from 0.4% to 0.7% of GDP. Outstanding liabilities stood at about 28.1% of GDP in 2024-25, with committed expenditures, including salaries, pensions, interest payments and subsidies, absorbing about 62% of states’ revenue receipts in 2023-24, leaving limited room for discretionary spending, the Survey said.

Against this backdrop, higher allocations to cash transfers involve clear trade-offs, with additional revenue expenditure threatening to crowd out spending on critical social and physical infrastructure. Many programmes lack sunset clauses or periodic reviews, increasing rigidity in revenue budgets and constraining capital expenditure, which the Survey said has a stronger and more durable impact on growth.

Gilt Yields
From a macro perspective, fiscal indiscipline at the state level also casts a shadow on sovereign borrowing costs. With markets pricing government debt on a consolidated basis, persistent revenue deficits or an expansion of committed expenditures at the state level could affect sovereign bond yields, the Survey said.