Unconditional Cash Transfers: Risks to State Finances Explored

Economic Survey 2025-26 raises concerns on fiscal sustainability with rising cash transfers for women in key States ahead of elections.

Gopi

•January 30, 2026•5 mins read

Cash transfers boosting immediate household welfare

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1. Context: Rising Reliance on Unconditional Cash Transfers (UCTs)

States heading into major Assembly elections in 2026 have significantly increased spending on unconditional cash transfers, especially to women. The Economic Survey 2025-26 highlights that while such transfers provide short-term welfare gains, they also risk creating long-term fiscal rigidity. These programmes are politically attractive but economically costly when not paired with employment and skilling investments.

The Survey notes a sharp rise in UCT spending, estimated at ₹1.7 lakh crore in FY 2025-26, with the number of States adopting them increasing more than five-fold since 2022-23. Many of these States already face revenue deficits, raising concerns about whether they can sustain these commitments without crowding out essential development expenditure.

The political economy context is crucial: West Bengal, Tamil Nadu, Kerala, Assam and Puducherry will face elections in 2026, and welfare cash transfers have become a central contestation point. Without careful scrutiny, these schemes may lock States into committed expenditures that reduce flexibility for future development needs.

The governance logic is that while UCTs offer immediate consumption support, unchecked expansion without sunset clauses creates structural fiscal pressures. If ignored, States risk long-term debt accumulation and squeezed development spending.

Key Statistics

UCT spending in FY 2025-26: ₹1.7 lakh crore
Increase in States implementing UCTs (2022-23 to 2025-26): 5×
UCT spending as share of GSDP: 0.19% – 1.25%
UCT spending as share of total State budgets: 0.68% – 8.26%

2. Short-term Gains vs Medium-term Growth Concerns

Unconditional cash transfers have demonstrated short-term benefits such as stabilising consumption, especially among women and lower-income households. Last year’s Survey itself acknowledged their role in enabling debt repayment and meeting basic needs. Many programmes are conceptualised as compensation for unpaid labour, particularly domestic and care work.

However, the 2025-26 Survey warns that the rapid scale-up of these schemes without productivity-enhancing investments may undermine medium-term growth. States increasingly allocate revenue resources towards consumption support rather than capability-building sectors such as education, skilling and job creation.

Persistent cash transfer commitments limit fiscal manoeuvrability. As revenue expenditure rises, capital expenditure—known for its strong multiplier effect—becomes vulnerable to cuts, especially during periods of revenue stress.

The development logic is that consumption-boosting transfers, though socially beneficial, do not substitute for job creation and human capital formation. If States prioritise UCTs over capital expenditure, growth potential declines and welfare dependency may rise.

Impacts

Short-term:

Increased consumption among low-income households
Enhanced financial autonomy for women Medium-term risks:
Lower capital formation
Reduced labour productivity growth
Rising fiscal stress and deficits

3. Fiscal Structure of States: Shifting Composition of Expenditure

Revenue expenditure constitutes 84% of total State spending (2023-24), slightly lower than 86% in 2018-19. However, within revenue expenditure, the composition has shifted significantly towards UCTs and other committed outlays (e.g., salaries, pensions, interest payments). This trend reduces the fiscal space available for discretionary or developmental spending.

States with persistent revenue deficits face greater difficulty in reprioritising resources. When expenditure items lack sunset clauses, periodic review mechanisms or performance-linked criteria, they become permanently “locked in”, creating structural rigidity in State budgets.

The Survey cautions that rising committed expenditures limit fiscal resilience during economic shocks. When revenues stagnate or deficits rise, capital expenditure often becomes the first casualty due to its discretionary nature, even though it has a much higher multiplier effect.

The fiscal logic is that rigid revenue expenditure—especially via unconditional schemes—erodes States’ ability to invest in future growth drivers. Ignoring this shift risks creating a cycle of low growth, high deficits and constrained public investment.

Challenges

Rising committed revenue expenditure
Inadequate review mechanisms and absence of sunset clauses
Reduced capacity to expand capital expenditure
Elevated deficits in several States

4. The Fiscal Trade-off: Welfare Commitments vs Developmental Investment

The Survey highlights a core trade-off confronting States: expanding UCT programmes improves short-term welfare but reduces resources for social and physical infrastructure unless deficits rise. However, increasing deficits is not a sustainable option, especially for States already struggling with debt stress.

Many States face competing demands—welfare commitments, infrastructure expansion, social sector delivery, and fiscal consolidation under the FRBM framework. Cash transfer programmes that are universal or perpetual exacerbate this tension, limiting States’ ability to undertake high-impact capital projects or innovations in service delivery.

A constrained fiscal environment also affects human capital outcomes. Inadequate capital investment in schools, health facilities, digital infrastructure or irrigation systems reduces long-term economic resilience and productivity gains for large populations.

The policy logic is that States must balance welfare objectives with long-term growth imperatives. If States continue expanding unconditional schemes without reprioritisation, they risk weakening their growth foundation and compromising future welfare capacity.

Consequences

Crowding out of capital expenditure
Delayed infrastructure creation
Reduced fiscal space for skilling, health and education
Heightened debt vulnerabilities

Conclusion

Unconditional cash transfers have clear welfare gains, especially for vulnerable groups, but their rapid expansion has created fiscal challenges that the Economic Survey 2025-26 brings into sharp focus. The core governance challenge is achieving a balance between short-term social protection and medium-term developmental investment. Sustainable welfare must be anchored in strong growth, which in turn depends on adequate capital expenditure, skilling and job creation. A calibrated approach—featuring periodic evaluations, sunset clauses and complementary investments—will be essential for long-term fiscal stability and inclusive development.

Quick Q&A

Everything you need to know

Unconditional Cash Transfers (UCT) are direct payments made to individuals or households without requiring them to meet specific conditions such as work, school attendance, or health check-ups. They are often targeted at vulnerable populations, including women and low-income households, to provide immediate income support and help meet basic needs.

The Economic Survey 2025-26 acknowledges that UCTs have short-term positive effects, such as enhancing consumption, reducing debt burdens, and supporting women’s personal and health needs. For instance, last year’s Survey noted that cash transfers allowed poorer households to fund basic necessities and repay loans, directly improving welfare outcomes.

However, the Survey warns against rapid scale-up and persistent use of UCTs without complementary investments in employment, skills, and human capital. The concern arises from fiscal sustainability issues, as rising expenditure on UCTs—estimated at ₹1.7 lakh crore for 2025-26 and increasing five-fold across States—can constrain resources for productive capital spending, limiting medium-term growth prospects.

Medium-term growth depends on the accumulation of productive capital and human capital development. When States allocate a growing share of their limited fiscal resources to unconditional cash transfers, there is less room for capital expenditure such as infrastructure projects, education, and skill development programs that have lasting growth impacts.

The Survey highlights that UCTs, while providing immediate relief, are largely revenue expenditures and increasingly rigid due to programme design issues like absence of sunset clauses or periodic reviews. This rigidity reduces fiscal flexibility, potentially crowding out spending on long-term growth-enhancing projects.

For example, a State spending heavily on UCTs may postpone or scale down road and digital infrastructure investments. While short-term consumption may rise, the long-term productivity gains that infrastructure and human capital investments provide are forgone, leading to slower sustainable growth over time.

States face increasing fiscal pressure due to the expansion of unconditional cash transfers. The Survey notes that about half of the States implementing UCTs are in revenue deficit, meaning their revenue expenditure exceeds revenue receipts. Revenue expenditure already accounts for 84% of total spending, and UCTs are absorbing a rising share of this limited fiscal space.

This crowding-out effect limits the ability of States to expand capital expenditure on infrastructure and social development. Without additional revenue sources or borrowing capacity, States cannot sustain both high transfer payments and essential investments. Persistent deficits, if unchecked, could worsen financial health and elevate borrowing costs.

For instance, a State increasing UCT spending to meet political objectives during an election year may have to reduce road construction, hospital expansions, or skill development programs, thereby trading long-term growth for short-term welfare gains.

The primary trade-off lies between immediate welfare gains and long-term investment in productive capacity. UCTs provide quick relief and improve household consumption, particularly for vulnerable groups such as women, but they also consume fiscal resources that could be used for capital expenditure with higher multiplier effects on growth.

Another dimension is fiscal rigidity. Many UCT schemes lack sunset clauses or periodic evaluations, making them recurring commitments that cannot be easily reduced. This reduces flexibility in budgeting and may force States to choose between raising deficits, cutting other vital expenditures, or delaying investments.

Example: In 2025-26, States spending heavily on UCTs may face a situation where the construction of new hospitals or school infrastructure is postponed to meet fiscal targets, illustrating a trade-off between short-term welfare and medium-term growth sustainability.

Between 2022-23 and 2025-26, the number of States implementing UCTs increased more than five-fold. For example, in States like West Bengal and Kerala, UCT programmes directed at women have been scaled up significantly, providing immediate financial support for health and household needs. These transfers have helped reduce debt reliance and boosted consumption, especially among lower-income households.

However, the fiscal cost has been substantial. The aggregate spending on UCT programmes is estimated at ₹1.7 lakh crore, representing 0.68-8.26% of State budgetary expenditure in different States. States with limited revenue bases and high UCT commitments, like Assam, face rising deficits, which constrain capital investments in infrastructure and social services.

Thus, while UCTs have a positive impact on immediate welfare, their rapid expansion highlights the importance of balancing short-term relief with long-term fiscal prudence and investment priorities.

Economic Survey 2025-26 takes a cautious stance on UCTs, highlighting both benefits and risks. On the positive side, UCTs can act as targeted social support, empowering women, enhancing household consumption, and reducing short-term poverty. These are politically and socially desirable outcomes, especially in election years where welfare schemes can improve immediate voter well-being.

However, the Survey emphasises the fiscal and growth trade-offs. Rapid expansion of UCTs ahead of elections may provide short-term popularity gains for ruling parties but can lead to elevated deficits, reduced capital expenditure, and constrained medium-term growth. The political economy dimension is critical, as States may prioritise immediate electoral gains over long-term fiscal sustainability.

Example: In West Bengal, Tamil Nadu, Kerala, and Assam, States with elections in 2026 have seen a surge in UCT implementation. While this addresses immediate consumption needs, policymakers must carefully design programs with sunset clauses and periodic reviews to avoid creating rigid, long-term fiscal burdens.

Designing sustainable UCT programmes involves multiple strategies:

Targeting: Direct transfers to the most vulnerable populations rather than universal schemes ensures efficient use of resources.
Complementarity: Combining UCTs with investments in skill development, healthcare, and education enhances human capital and growth potential.
Periodic evaluation: Introducing sunset clauses and regular reviews ensures that programmes are adjusted based on outcomes and fiscal capacity.

For example, a State could provide conditional or time-bound transfers to women, linked to healthcare check-ups or skill development workshops. This maintains immediate support while building long-term capabilities. Another approach is to cap UCT spending to a percentage of revenue, ensuring capital expenditure is not unduly compromised.

By adopting such measures, States can maintain the dual objectives of social protection and medium-term growth, avoiding the pitfalls of fiscal rigidity and unsustainable revenue commitments highlighted in the Economic Survey 2025-26.

Attribution

Original content sources and authors

T.C.A. Sharad Raghavan

The Hindu

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