Economic Survey 2025-26 Raises Alarm Over State-Level Fiscal Populism
The Economic Survey for 2025-26, tabled in Parliament, has issued a stark warning about the rising trend of fiscal populism in several Indian states, particularly through the expansion of unconditional cash transfers (UCTs). According to the report, this practice poses significant risks by potentially crowding out growth-enhancing capital expenditure and undermining India's overall fiscal credibility.
Deteriorating State Revenue Balances
Between FY19 and FY25, a total of 18 states experienced a deterioration in their revenue balances. The survey reveals that:
- 10 states slipped from revenue surplus into revenue deficit.
- 5 states worsened their existing revenue deficits.
- 3 states remained in revenue surplus but still saw a decline.
Consequently, the number of revenue surplus states dropped from 19 in FY19 to 11 in FY25, leading to an increase in the combined revenue deficit of states from 0.1% to 0.7% of GDP. Revenue deficit, which occurs when revenue expenditure exceeds revenue receipts, is considered less desirable as it often funds committed expenses like salaries and pensions, rather than long-term asset creation through capital expenditure.
Rapid Expansion of Cash Transfer Schemes
The survey notes that unconditional cash transfers have seen a dramatic rise across states, now constituting a growing portion of state-level welfare spending. Key findings include:
- Aggregate spending on UCT programmes, especially for women, is estimated at approximately Rs 1.7 lakh crore for FY26.
- The number of states implementing such schemes increased more than fivefold between FY23 and FY26.
- Around half of these states are estimated to be in revenue deficit, exacerbating fiscal pressures.
Impact on Sovereign Borrowing and Growth
The Economic Survey emphasizes that fiscal indiscipline at the state level can no longer be viewed in isolation, as it directly affects sovereign borrowing costs. With markets pricing government debt on a consolidated basis, persistent revenue deficits or an expansion of committed expenditures could lead to higher sovereign bond yields, increasing the cost of borrowing for the government.
Furthermore, the survey warns that these cash transfers, while serving important distributional goals, account for a significant share of outlays, leaving constrained space for capital expenditure. This is concerning because capital expenditure has a stronger and more durable impact on economic growth compared to revenue expenditure.
Call for Fiscal Reprioritisation
To address these challenges, the Economic Survey advocates for:
- Improved targeting and periodic review of welfare schemes.
- An outcome-oriented design to mitigate fiscal rigidities.
- Careful reprioritisation within state budgets to preserve fiscal space for capital formation and human-capital investment.
The survey underscores that investing in growth-enhancing areas yields more persistent gains in household incomes, labour productivity, and overall welfare than a steady expansion of open-ended cash transfers. It calls for complementary discipline in revenue expenditure to ensure that short-term income support does not erode the investments essential for inclusive, medium-term prosperity.
Broader Fiscal Trends
The combined gross fiscal deficit of states rose from 2.6% of GDP in FY22 to 3.2% in FY25, while the combined revenue deficit increased from 0.4% to 0.7% of GDP. This indicates continued borrowing to finance revenue expenditure, with outstanding liabilities reaching about 28.1% of GDP in FY25. Committed expenditures, such as salaries, pensions, interest payments, and subsidies, absorbed approximately 62% of states' revenue receipts in FY24, leaving limited fiscal flexibility for other priorities.
