Fiscal populism, cash transfers by states risk crowding out growth-enhancing spending, affect India’s fiscal credibility: Economic Survey 2025-26

The Survey said unconditional cash transfers (UCTs) have expanded rapidly across several states and now form a growing share of state-level welfare spending. “Aggregate spending on UCT programmes, particularly for women, is estimated at approximately Rs 1.7 lakh crore for FY26. 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,” it said.

While cash transfers serve important distributional objectives, their scale and design need to be balanced against the imperative of preserving space for growth-enhancing investments, the Survey said.

Any fiscal indiscipline at the state level can no longer be treated as locally contained as it can affect the sovereign borrowing, the Survey said. Improved targeting, periodic review, and outcome-oriented design can help mitigate fiscal rigidities.

“From a macro perspective, any fiscal indiscipline at the State level also casts a shadow on the 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 Economic Survey said. It also said that these transfers accounts for the most of the outlay and leave a very constrained space for the capital expenditure, whose growth impact is stronger and more durable.

The combined gross fiscal deficit of states increased from 2.6% of GDP in FY22 to 3.2% in FY25, while the combined revenue deficit increased from 0.4% to 0.7% of GDP, indicating continued borrowing to finance revenue expenditure. The outstanding liabilities stood at about 28.1% of GDP in FY25. Committed expenditures such as salaries, pensions, interest payments, and subsidies, absorbed about 62% of States’ revenue receipts in FY24, leaving limited fiscal room, the Survey said.

The Economic Survey also called for careful reprioritisation within State budgets. “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 the Centre’s incentives have supported higher State capital outlays in recent years, sustaining growth will depend on complementary discipline within revenue expenditure, so that short-term income support does not erode the very investments on which inclusive, medium-term prosperity ultimately rests,” it said.