Welfare vs fiscal health: Are welfare schemes a burden?; States face rising debts amid heightened subsidy commitments and political pressures

K Shanmugam & K R Shanmugam

Prime Minister Narendra Modi likened excessive welfare schemes to a “revdi culture” that strains state finances. Courts cautioned that indiscriminate freebies may discourage work and distort electoral fairness. Opposition parties in Bihar called the one-time dole of `10,000 by the govt close to the polls an electoral handout.


Supporters of welfare-led governance in Tamil Nadu say sustained public spending on welfare has reduced social fragmentation across caste, religion and gender, while contributing to the state’s economic performance.Various govts have over the years expanded spending on subsidies through a range of welfare schemes, which have been labelled everything from fiscally irresponsible to necessary for minimum standards in essential services.The Centre gives subsidies in power, food, fertiliser and fuel, while states provide support for food, electricity, transport, health, education, nutrition and agriculture, sometimes in partnership with the Centre. Together, these interventions constitute a significant share of public expenditure.

The economic rationale lies in correcting market failures in essential services such as education, healthcare and food security, which poor households tend to under-consume.Political considerations have also driven the spread of subsidies, as voters demand immediate benefits because long term structural challenges such as poverty and unemployment are slow to resolve. Several targeted schemes for women, farmers, youth and senior citizens as in Tamil Nadu have pushed total subsidy expenditure across states and Union Territories from `1.87 lakh crore in 2018-2019 to `4.72 lakh crore in 2024-2025, nearly 10% of the state’s revenue expenditure.Among 20 major states, Maharashtra recorded the highest subsidy expenditure at `66,260cr in 2024-2025, followed by Tamil Nadu at `52,603cr. On a per capita basis, Karnataka leads with `7,465, followed by Tamil Nadu at `6,812. At the lower end, Assam at `120 and Kerala at `414 report the lowest per capita subsidy spending.Rising subsidy commitments have coincided with growing debt in several states. Despite strong GSDP growth, Tamil Nadu and Karnataka saw their outstanding liabilities climb to `7.58 lakh crore and `5.9 lakh crore in March 2024.

A comparison of per capita income and per capita subsidy across states in 2024-2025 shows that richer states spend more per capita on subsidies. This may be linked to higher inequality and the large absolute number of poor in these states, or intense political competition that drives the expansion of freebies irrespective of economic need.More strikingly, the relationship between per capita subsidy and poverty ratios (2022-23) reveals a paradox: per capita subsidy rises as poverty declines. States with relatively low poverty such as Tamil Nadu (1.43%), Karnataka (5.67%) and Maharashtra (5.48%) spend disproportionately more than comparable states. This suggests that electoral incentives, rather than economic necessity, drive subsidy allocation, raising concerns about long-term fiscal sustainability.Supporters of Tamil Nadu’s welfare-centric development model say it has contributed to state’s economic performance. This is true where spending has been applied judiciously in education, health and social protection. On the fiscal side, the state’s outstanding liabilities remain within limits set by the 15th Finance Commission, and the govt has budgeted to reduce the fiscal deficit to 3% of GSDP in 2025-2026. However, a revenue deficit exceeding 1% of GSDP remains a concern, as borrowing continues to fund recurring expenditure, including unconditional cash transfers.

States have also changed how welfare is delivered, many shifting from in-kind subsidies to direct benefit transfers (DBTs), where cash is deposited into beneficiaries’ bank accounts. Similar experiments have been attempted even within the PDS in some states. DBTs can improve welfare delivery by better targeting vulnerable groups, providing immediate liquidity, reducing administrative costs, and lowering leakages, corruption, and rent-seeking. They also enhance fiscal transparency.However, the effectiveness of cash transfers, especially for schemes such as the PDS remains contested. Govts and political parties increasingly find DBTs politically convenient, as cash transfers allow visible and direct benefits to targeted voter groups.

This approach gained momentum after economists promoted cash transfers as a solution to leakage-prone welfare systems, drawing inspiration from Latin America and other developing countries.Consequently, cash transfer schemes targeted at women have proliferated. At present, 14 states operate such schemes under labels such as economic support, financial inclusion, or empowerment. Assistance ranges from `1,000-`2,500 a month, with some states offering one-time payments of up to `10,000, as in Bihar. Although framed as empowerment measures, many schemes were introduced in the run-up to major elections, with the explicit aim of securing women’s votes, a decisive electoral bloc.Quantitative assessments indicate that from 2009 to 2024, cumulative savings from reduced leakages amounted to `3.48 lakh crore, while subsidy spending as a share of total govt expenditure declined from 16 % to 9 %.

Simultaneously, beneficiary coverage expanded nearly 16‑fold. However, a recent report shows that 12 states plan to spend `1.68 lakh crore in 2025-2026 on unconditional cash transfers to women, a substantial budgetary commitment.Subsidies vary widely in their economic impact. Good subsides are targeted, enhance human capabilities, and support vulnerable groups without distorting markets. In contrast, bad or poorly designed subsidies distort prices, encourage dependency and fail to improve productivity.

Such subsidies may discourage labour force participation if not linked to skills or employment, entrench intergenerational dependence, reduce fiscal space for development expenditure, crowd out capital investment, and increase public debt as states borrow to finance recurring welfare commitments. Universal cash transfers may also fuel localized inflation if supply fails to keep pace with demand.Despite these risks, political parties often extend benefits universally to maximise electoral gains rather than targeting specific groups to achieve clear economic objectives. In the process, accountability and sound economic rationale are compromised. While a conceptual distinction exists between essential, productivity-enhancing subsidies and electorally motivated freebies, this distinction is increasingly blurred.

Competitive populism has become the norm, with short-term electoral success often prioritised over fiscal discipline.The goal should not be to eliminate subsidies, but to ensure that they are targeted, efficient, and transparent, and aligned with long-term development priorities, and financed through sustainable revenue sources rather than excessive borrowing.

(K Shanmugam is former chief secretary, GoTN; K R Shanmugam is former director,Madras School of Economics)