Do cash and kind transfer schemes create welfare-investment dilemma?

The rise of women-centred cash transfers reveals two truths at once: women have finally moved to the centre of welfare policy, and states are committing to them even when finances are tight. At the same time, such welfare programmes, especially direct transfers to farmers and women, often narrow fiscal space and stretch the capacity to invest in long-term development. 

And as these commitments expand, a question emerges: can welfare programmes continue to grow without constraining the fiscal space needed for tomorrow’s investments? Let’s explore.

How India built a hybrid welfare state

Over the past decade, India has moved from a welfare system based on ration shops and public works to one increasingly defined by digital transfers and women-focused income support. This change has become most visible after 2020, when several states began transferring cash directly into women’s bank accounts at a scale not seen before. 

Thus, India’s welfare system has travelled far from its early years. After independence, the state focused on fighting hunger and building basic economic security. The Constitution’s Directive Principles – reducing inequality (Article 38) and securing livelihoods (Article 41) – shaped the welfare model built on food distribution, public works, and subsidised services. The Public Distribution System (PDS), land reforms, and early employment programmes became essential tools in a country grappling with shortages and weak markets.

Over time, welfare took two clear forms. Initially, in-kind transfers delivered essential goods: subsidised grain through the Public Distribution System, cooked meals under PM-POSHAN, housing through PMAY, and nutrition kits under POSHAN. These programmes provided a minimum level of security when household incomes dipped.

Cash transfers came later, enabled by Aadhaar, Jan-Dhan, and DBT. These schemes deposit money directly into beneficiaries’ accounts, giving households the freedom to use it according to their needs. PM-KISAN gives income support to farmers; pensions reach the elderly, widows, and the disabled generally through direct transfers. 

Together, these two forms – cash and kind – have built a hybrid welfare state, which is closely connected to households. Let’s examine some cash and kind schemes.

Cash transfer impact: does number tell full story?

At the heart of every welfare system lies a simple idea: a society must share its resources so that its citizens can live with dignity. Economist Richard A Musgrave’s public finance theory, outlined in his book The Theory of Public Finance (1959), explains this through three basic duties of the state: 

Allocation – Provide essential goods. 

Distribution – Support those who need help. 

Stabilisation – Keep lives stable during hard times.  

These duties are clearly reflected in India’s in-kind welfare schemes, such as Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), Pradhan Mantri Poshan Shakti Nirman (PM POSHAN), Saksham Anganwadi and POSHAN 2.0, Pradhan Mantri Awas Yojana-Gramin and Pradhan Mantri Awas Yojana-Urban (PMAY-G/U), Deendayal Antyodaya Yojana – National Rural Livelihood Mission (DAY-NRLM), and Pradhan Mantri Ujjwala Yojana (PMUY).  

Together, these schemes cross 3.4 lakh crore, about 7 per cent of the Union Budget and make daily life more secure for millions.

Similarly, cash transfers add another layer of support to the welfare system. Some cash transfer schemes are: Pradhan Mantri Kisan Samman Nidhi scheme (PM-KISAN) and National Social Assistance Programme (NSAP). These cash schemes amounting to 73,000 crore are almost 1.5 per cent of the Budget. 

Taken together, these central cash and in-kind transfers of welfare schemes reached 3.85 lakh crore, or nearly 8.5 per cent of government spendings. 

Their real impact is felt not in numbers, but in everyday moments: a child who eats better, a mother who breathes easier, a farmer who avoids a moneylender, a family that finally feels steady. In this way, India’s welfare system shows the simple truth behind Musgrave’s idea: public finance is not just about managing money, but about giving people safety, choice, and hope. 

New wave of women-centred cash transfers

Building on the recognition that targeted support can transform households, states began experimenting with more direct assistance for women. The new wave of women-centred cash transfers by states began in 2020, when Assam launched Orunodoi, the first major universal-style cash support scheme for women. When West Bengal followed in 2021 with Lakshmir Bhandar, the ripple grew into a full wave.

Today, 13 states run cash-transfer schemes that place money directly into the hands of women. While Bihar provides a one-time assistance of 10,000, the rest of the 12 states provide monthly payments. Together, these commitments amount to 1.75 lakh crore in 2025-26, roughly 0.5 per cent of India’s GDP. This is no longer a small welfare experiment; it represents a major shift in the way states design their budgets.

The numbers speak clearly. Maharashtra (36,000 crore), Karnataka (28,608 crore), West Bengal (26,700 crore), and Madhya Pradesh (18,669 crore) now spend more on women’s transfers than on irrigation, rural roads, or even key public health systems. Jharkhand commits 13,363 crore, Tamil Nadu 13,807 crore, Odisha 10,145 crore, and Bihar 7,500 crore through its one-time grant. When welfare reaches such a scale, it becomes a defining feature of state policy.

But scale also brings strain. Six of these thirteen states slip into a revenue deficit once these schemes are included. With state debt already close to 27.5 per cent of GDP, these monthly commitments narrow fiscal space and stretch the capacity to invest in long-term development. 

A political economy trap?

The welfare spending does not end with a single Budget. These commitments return every year – food security, pensions, nutrition, and cash support for women and farmers. As they grow, they gradually but steadily squeeze the space needed for the investments to build tomorrow. To maintain the fiscal deficit at 4.4 per cent of GDP, a quiet calculation needs to be made each year: raise more revenue, borrow more, or cut investment. None of these choices comes without costs. 

But this tension is not simply arithmetic. It is political too. Welfare programmes, especially direct transfers to farmers and women, generate immediate and visible gains. Their benefits arrive quickly and are felt directly in households. This makes them electorally attractive. 

In contrast, capital projects such as irrigation networks, public hospitals, or digital infrastructure take years to show results. Their benefits are diffuse, long-term, and often go unnoticed in the short term. As a result, political incentives favour expanding welfare even when fiscal room is tight, while long-term investments, though essential for productivity and growth, are easier to postpone.

This creates what economists call a political economy trap: welfare spending becomes sticky and hard to reduce, investment becomes flexible and easy to cut, and deficits become progressively harder to manage. The trap is reinforced by the fact that reducing welfare may risk immediate public backlash, whereas cutting capital expenditure is less visible and politically safer. Yet shifting too far toward recurrent spending undermines the state’s ability to build the foundations of future prosperity.

Managing this tension requires more than budget sheets/spreadsheets. It demands transparent accounting, credible Fiscal Responsibility and Budget Management discipline, and a long-term commitment to protect capital investment even when short-term pressures rise. The challenge is not to choose between welfare and growth, but to hold both together – meeting urgent needs today without weakening the fiscal and economic capacity that tomorrow depends on. 

How welfare-investment dilemma can be addressed 

The welfare-investment dilemma becomes manageable when states manage to hold two responsibilities simultaneously: protecting people in the present and investing in the conditions that shape their future. Tamil Nadu shows that strong welfare can sit alongside strong investment when governments protect spending on health, education, and basic services.

Karnataka demonstrates that building a solid growth base, through technology, skills, and industry, makes welfare more sustainable because rising revenues reduce fiscal stress. Gujarat reminds us that when the investment engine stays active, with infrastructure and MSMEs at the centre, the tax base expands and the room for welfare grows rather than tightens.

For other states, the lesson is clear: balance is the only way forward. Welfare must protect people today, while investment must secure tomorrow. But many states face a tighter squeeze because their welfare spending is rising faster than the funds they receive from the Centre. Here, the Union government bears a crucial responsibility. 

It can be argued that the centre needs to protect capital spending, ensure predictable transfers to states, strengthen GST revenues, and make sure welfare expansion does not come at the cost of long-term development. A fiscally strong union makes fiscally responsible states possible. India’s welfare future depends on maintaining this balance, compassion paired with prudence, protection matched with possibility.

Post read questions

The rise of women-centred cash transfer schemes across states marks a new phase in India’s welfare politics. Analyse the benefits and risks of this model, especially in the context of fiscal federalism. 

Expanding welfare commitments without expanding fiscal capacity creates a structural tension in public finance. Discuss this tension with reference to India’s recent welfare schemes and fiscal deficit targets.

Direct Benefit Transfers (DBT) have improved efficiency and inclusion. However, they raise new challenges for fiscal sustainability. Evaluate. 

Welfare schemes deliver immediate electoral visibility, while capital projects yield long-term and diffuse benefits. Discuss how this shapes state policy priorities in India.

In the context of Musgrave’s theory of public finance, analyse whether India’s current welfare spending structure aligns with the principles of allocation, distribution, and stabilisation.

(Pushpendra Singh is an Assistant Professor of Economics at Somaiya Vidyavihar University, Mumbai, and Archana Singh is an Assistant Professor of Gender and Economics at the International Institute for Population Sciences, Mumbai.)

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