In many States, cash transfers have increasingly become a preferred welfare tool in the public finance framework of India. These transfers involve direct monetary payments to beneficiaries, usually deposited into their bank accounts. These are broadly classified into conditional and unconditional transfers. While conditional transfers are linked to outcomes such as education or health, etc., unconditional cash transfers (UCTs) impose no performance or usage conditions.
Historically, unconditional cash transfers in India were limited to social security pensions and farmer income support schemes. However, over the past decade, States have expanded cash-based welfare to wider population groups due to improvement in digital delivery systems. The 16th Finance Commission headed by Arvind Panagariya for the 2026-31 award period had cautioned that unchecked unconditional cash transfers risk severe fiscal destabilisation, capital expenditure starvation and long-term public debt burdens on States.
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These untargeted payments surged from 3 per cent to 20.2 per cent of total State subsidies expenditure between 2018-19 and 2025-26. This indicates a structural shift in how States allocate their welfare spending. The Finance Commission noted that while pensioners and farmer support accounted for nearly 84 per cent of unconditional cash transfers in 2018-19, their share has fallen significantly. By 2025-26, large-group schemes alone account for 47.4 per cent of all unconditional transfers overtaking traditional categories.
This reflects a growing preference for politically visible, broad-based cash schemes over target or merit -based subsidies. The Finance Commission highlighted that some States such as Maharashtra, Odisha and Jharkhand witnessed the steepest rise in such spending over past two years. The outlays for wide-group schemes escalated dramatically across multiple States and is projected to hit Rs.1.96 lakh crore. Thus, there is explosive growth in unconditional cash transfer schemes across States.
The Finance Commission flagged lack of standardization with many States misclassifying direct welfare cash payments as general administrative grants, assistance or other miscellaneous expenditures. Large recurring cash handouts frequently crowd out vital State spending on public health, education and infrastructure creation. It results in displacement risk and fiscal constraints in the States. As a proportion of total State expenditure, the expenditure on these UCT schemes was highest at 10.03 per cent in Jharkhand, followed by West Bengal at 7.84 per cent and Karnataka at 7.53 per cent.
The least percentage was 0.26 in case of Himachal Pradesh. According to the 16th Finance Commission report, almost 44 per cent of State expenditure is tied up in interest payments, pensions and salaries indicating that States do not have much space to manoeuvre for financing new initiatives or investing in necessary infrastructure. The Finance Commission has raised many fiscal concerns about the huge cost of unconditional transfer schemes in many States. A major concern is the crowding out of capital expenditure. Rising revenue spending on cash transfers limits States’ ability to invest in infrastructure, education and health which are critical for long-term growth.
The Commission has cautioned that unchecked expansion of UCT can destabilise State finances in the long run. Such schemes impose a recurring fiscal burden and reduce flexibility in budgetary allocations. The Commission has observed that many of these transfers are poorly targeted expanding into large beneficiary bases that dilute their redistributive effectiveness. The Commission has also cautioned against financing these schemes threw off-budget borrowings, guarantees or revenue assignments, calling such practices fiscally imprudent due to reduced transparency in public accounts.
The major schemes under UCT include Majhi Ladki Bahin Yojana (Maharashtra) with Rs.1500 per month to eligible women, Lakshmir Bhandar (West Bengal) with Rs.1200 per month to women aged 25 to 60 years and Gruha Lakshmi (Karnataka) with Rs.2000 per month to women heads of households. In other States also, similar social welfare schemes have been implemented to extend financial assistance by direct bank transfer to eligible beneficiaries. Some experts are of the opinion that such cash transfers are a “compensation” for the failure of the State to create opportunities for all.
There is a necessity to put in place clear exclusion criteria for eligible beneficiaries for rationalisation. The States need to restrict cash transfers to verified, highly vulnerable population rather than broad untargeted demographics. Further States need to build periodic and rigorous reviews and mandatory termination timelines into populist cash programmes to prevent permanent fiscal commitments. Introduction of sunset or exit clauses especially for non-merit and general unconditional transfers is a paramount necessity.
The States are required to adopt transparent, standardized book-keeping and disclosure rules for all State-level subsidies and direct transfers. The impact of the cash transfer schemes on women’s empowerment is vigorously debated. These cash transfers constitute a significant portion of the monthly earnings of female self-employed and casual workers. They also account for a significant portion of spending by the bottom 50 per cent of the population across various States.
While cash transfers can alleviate income poverty in the short run, as standalone measures, their impact on empowerment is uncertain. They may also reduce women’s participation in paid work. The States are also required to discontinue off-budget financing mechanism for continuation of welfare schemes. The Commission has emphasised that welfare policies must align with fiscal responsibility and deficit reduction goals, rather than becoming permanent entitlements without periodic review. It is pertinent to mention that the timing of the cash transfers, immediately before elections, has also led many to call them a “dole”.
The recent protests across some States demanding better facilities and greater accountability are an indication that people are no longer satisfied with only “compensation” and demand fair and improved public services and infrastructure facilities. The huge cost of UCT schemes in States is a matter of serious concern and increases their fiscal burden. Hence, they should pay due attention to the warning signals emanating from the 16th Finance Commission report and take necessary remedial measures.
(The writer is a retired development banker and columnist)
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