This May Be the Decade When India’s Fiscal War Began

India's states are diving deep into a fiscal war, channeling enormous funds into cash transfer schemes and freebies. The estimated ₹2.75 lakh crore spending spree—including ₹1.6 lakh crore on direct transfers to women in FY26—now consumes up to 25% of state revenues. While these measures appear empowering, history warns of financial peril.

Major schemes include Maharashtra’s Mukhyamantri Majhi Ladki Bahin Yojana (₹36,000 crore) and Karnataka’s Gruha Lakshmi Scheme (₹28,608 crore), followed by West Bengal, Madhya Pradesh, and others. These programs, designed for electoral success, impose a heavy financial strain with no clear exit strategy. Historical precedents, from ancient Rome’s Cura Annonae to modern Greece and Sri Lanka, suggest that excessive populist spending often ends in economic collapse.

History’s Warnings: Lessons from the Past

• Ancient Rome: The Cura Annonae, originally a food price stabilization policy, turned into a massive welfare program under Emperor Augustus. The treasury eventually collapsed, contributing to Rome’s decline.
• Sri Lanka (2022): Excessive subsidies and cash handouts fueled a severe economic crisis, causing fuel shortages and 70% inflation.
• Greece (2010s): Long-term welfare spending led to a €320 billion bailout and prolonged austerity.

Indian states such as West Bengal, Punjab, and Himachal Pradesh are already struggling, with 65-75% of revenue receipts locked into committed expenditures, leaving minimal funds for productive investments.

Overview of Major Cash Transfer Schemes for Women

Source: PRS. Data for MP, TN, Jharkhand, and Chhattisgarh is for FY24-25. Haryana is estimated.

The Misuse of Public Resources

While these schemes aim to uplift the underprivileged, the actual beneficiaries often include well-off individuals. Consider:

• In Delhi, a retired government couple with substantial pensions enjoys free electricity, despite being financially secure.
• In Bangalore, a tech professional couple earning ₹2 crore annually manipulates free power benefits across multiple meters in their home.

This widespread misdirection drains resources meant for those genuinely in need, further distorting the state economy.

The Flawed Political Bargain

Ahead of upcoming elections in Bihar, RJD leader Tejaswi Yadav has promised ₹2,500 per month in cash transfers—equivalent to 50% of the state’s per capita income. This growing political arms race risks creating long-term dependency, mirroring Rome’s unsustainable welfare policies.

The economic consequences include:

• Inflation: Excess cash in circulation without parallel economic growth erodes purchasing power.
• Reduced Developmental Spending: Essential sectors like infrastructure, education, and healthcare suffer due to budgetary misallocation.
• Rising Fiscal Deficit: States borrow more, deepening financial instability.

Nobel laureate Paul Samuelson aptly noted, “Good intentions do not guarantee good results.”

A Call for Fiscal Responsibility

Political attitudes are beginning to shift. Telangana CM Revanth Reddy recently called for a nationwide debate on the feasibility of welfare guarantees. Key reforms are needed:

• Regulation on Populist Promises: Restrict pre-election giveaways that strain public finances.
• Capping Freebies: Limit such programs to a single-digit percentage of revenue, phasing them out as incomes rise.
• Stronger Fiscal Discipline: Align policies with the RBI’s 2022 fiscal guidelines and the Union Budget’s debt-to-GDP target (56.1% by 2026-27).
• Borrowing Limits: The central government should impose stricter borrowing controls on states.

Every rupee spent on populist schemes has an opportunity cost—it could have been invested in roads, education, or healthcare, yielding long-term economic gains.

Read More: 8th Pay Commission Fitment Factor: What It Means for Government Employees' Salaries