Red flags over sustainability of unconditional cash transfers

New Delhi: Unconditional cash transfers (UCT) by state govts now account for nearly half of the monthly per capita consumption expenditure among the rural population, raising concerns about fiscal sustainability and medium-term growth, especially when there is no complementary investment skilling and human capital, Economic Survey said.

It said that UCT to women alone could add up to Rs 1.7 lakh crore this year as more and more states have joined the bandwagon, typically around election time. Especially targeted at women, citing studies in seven states, the survey said these transfers account for as much as 87% of the monthly income for self-employed women workers and up to 24% for casual female workers. There are also studies showing that UCT adversely affects female labour force participation.




The survey noted that these transfers had expanded rapidly across states and now form a growing share of state-level welfare spending - ranging between 0.2% to 1.2% of state GDP and 0.7% to 8.3% of their budgetary spend. For policymakers, this means higher unproductive revenue expenditure squeezes capital spending, which creates long-term assets and has linkages with other sectors.

The proliferation of schemes is showing the revenue deficit numbers of states, which rose from 0.4% of GDP to 0.7% between 2021-22 and the last financial year.

Higher allocations to UCTs involve clear trade-offs. Unless deficits widen further, additional spending will crowd out resources for critical social and physical infrastructure. But deficits cannot widen any further without causing further deterioration in the overall financial health of the state, the survey said.

There may be a way out: periodic reviews or sunset clauses, which also makes beneficiaries plan better. It cited the example of a scheme in the Philippines that had a built-in review or exit mechanism. Several countries have linked cash transfers to clear, verifiable actions by beneficiaries, rather than providing open-ended income support. The survey cited programmes in Mexico and Brazil, which linked the transfers to children attending school regularly and pregnant women and young children undergoing checkups at health clinics.