India’s Welfare Schemes Across State, Central Levels Need A Revamp | The Reason Why

A poor woman in Odisha gets over Rs. 800 per month from the state government. Had she been living in Delhi, she would have received three times the amount. But if she stayed in Kerala, she would not get anything.

In recent years, Indian states have entered a competition nobody formally announced. Who can promise more cash, especially to women, before the next election? Political parties appeal to women by calling them sisters with friendly names in welfare schemes such as Ladli Behna and Ladki Bahin.

However, the impact that it has on state finances rarely makes headlines.

Cash transfers are often dismissed as populist and wasteful. The evidence suggests otherwise. When designed well, they are among the most effective tools for reducing poverty. Unlike traditional subsidies, cash gives households choice. Families differ in their needs — some need food, some healthcare, while others need education. Cash transfers respect this reality.

Research shows this flexibility improves nutrition, school participation, and financial stability. On a national level, they cut administrative costs and reduce leakages. It is no accident that over 180 countries now use direct cash payments.

The impact is stronger when cash is transferred to women. A 2023 study on West Bengal’s Lakshmir Bhandar scheme found that 86% of women reported a greater say in household decisions, while 61% felt their status within the family had improved.

SBI Research found that beneficiaries of Madhya Pradesh’s Ladli Behna scheme spent Rs. 9,302 more per person at local markets than those who didn’t receive. They spent on food, school expenses, healthcare, debt repayment, and small savings, showing that even modest transfers can boost household welfare and inject liquidity into local economies.

At present, 12 states have launched such unconditional cash transfer (UCT) schemes for women. Based on FY26 budget estimates, states together are expected to spend over Rs. 1.68 trillion, or about 0.5% of India’s GDP, on these programmes.

In several states, UCT schemes now absorb between 3% and 11% of total revenue receipts, making them a material and recurring fiscal commitment. According to PRS analysis, among the 12 states running these schemes, six are projected to record a revenue deficit in FY26.

A revenue deficit implies that a state’s regular income is insufficient to cover its day-to-day spending. If we exclude those schemes, we see that the state finances improve.

Karnataka, for instance, moves from a revenue surplus of 0.3% of GSDP to a revenue deficit of 0.6%, once UCT spending is included. In Madhya Pradesh, the surplus narrows sharply—from 1.1% of GSDP to just 0.4%. When the deficits rise, states resort to more borrowing.

The PRS analysis shows that between FY06 and FY25, states’ combined fiscal deficit rose from 2.4% to around 3% of GDP. Outstanding state debt now stands close to 27.5% of GDP — well above the 20% level recommended by the FRBM Review Committee. High debt affects state finances in two ways.

First, it reduces how effective government spending is. Economists measure this using the spending multiplier, which captures how much GDP grows by one rupee of government spending. Research shows that states with lower debt enjoy higher multipliers and vice versa. That means, heavily indebted states will not see higher economic growth even if they increase welfare spending compared to the low indebted state.

Second, high debt changes what states spend on. As interest payments rise, less money is left for capital expenditure and development spending. This weakens the state’s economic capacity and future growth. Thus, high debt not only raises fiscal stress but also lowers growth and future revenues, making it harder for states to break out of a debt cycle.

Therefore, states must prioritise reducing debt, which ultimately means fixing the math between revenue and expenditure. As I’ve argued earlier while writing about centrally sponsored schemes, states already operate with limited fiscal flexibility. When that narrow space is used for cash transfers, they cannot spend on infrastructure or on any contingency.

Therefore, welfare spending, by itself, is not a problem, nor is its size. We need a national mechanism to track fiscal exposure and evaluate outcomes of all the state schemes. We need a central coordinating body — under the finance ministry or NITI Aayog, similar to the GST Council, to do that.

More importantly, cash transfers cannot sit on top of an already crowded welfare architecture. The original idea behind a universal basic income was simple: transfer cash and phase out subsidies and overlapping schemes. This is a time when we need a revamp of both central and state-level schemes.

That means consolidation where programmes overlap, and discontinuation where they underperform. Without this, welfare will be costly. This will demand hard political choices and a broad consensus. It is difficult in the current scenario, but needed the most. Let’s keep our fingers crossed.

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