16th Finance Commission Sounds Alarm on Unconditional Cash Transfers, Urges Exit Clauses
The 16th Finance Commission has issued a stark warning about the rapid proliferation of large-group unconditional cash transfer schemes across Indian states, highlighting significant fiscal risks. In its report for the 2026–31 period, tabled in Parliament, the Commission chaired by economist Arvind Panagariya emphasized that this growing reliance on direct cash handouts could destabilize state finances if left unchecked.
Sharp Surge in Spending Flags Fiscal Imprudence
Flagging a concerning trend, the Commission noted that financing these schemes through off-budget borrowings, guarantees, or revenue assignments is fiscally imprudent. Such practices create opacity in public accounts and should be discontinued. The panel cautioned that without proper controls, these transfers impose a large fiscal burden and crowd out critical capital expenditure on essential services like education and health.
States with Steepest Rise in Cash Transfer Outlays
The Commission specifically singled out three states that have witnessed the most dramatic increases in such spending over the past two years:
- BJP-ruled Maharashtra: Spending jumped from 0.6% of total revenue expenditure in 2023-24 to 6.2% in 2025-26 (Budget Estimates).
- BJP-ruled Odisha: Recorded a sharp rise from nil to 5.1% over the same period.
- Opposition-ruled Jharkhand: Such spending escalated from 0.8% to 13% between 2023-24 and 2025-26.
The report states, "If major States continue to allocate rising proportions of revenue expenditures to large-group unconditional cash transfers, they will not only impose a significant burden on the States’ budgets but also destabilise their finances in the long run."
Major Schemes Reshaping Subsidy Landscape
Across 21 states, large cash transfer schemes—which involve direct payments without performance benchmarks or usage conditions—now account for over one-fifth (20.2%) of total subsidy spending in the 2025–26 Budget Estimates. This marks a sharp increase from just 3% in 2018–19. Prominent examples include:
- Maharashtra’s Majhi Ladki Bahin Yojana: Provides Rs 1,500 monthly to eligible women, with 2.3 crore beneficiaries as of January.
- Karnataka’s Gruha Lakshmi: Offers Rs 2,000 per month to women heads of households.
- West Bengal’s Lakshmir Bhandar: Grants Rs 1,200 monthly for SC/ST women and Rs 1,000 for women from the general category.
Structural Shift in Welfare Spending Patterns
The Commission highlighted a significant structural shift within unconditional cash transfers. While social security for pensioners and farmers constituted 84% of such spending in 2018–19, large cash transfer schemes like those above now make up nearly half (47.4%) of all unconditional transfers, overtaking both traditional categories by 2025–26.
This shift is partly attributed to improvements in delivery systems. The Jan Dhan–Aadhaar–Mobile (JAM) trinity has reduced leakages and enhanced efficiency, making cash payments to broad population groups a preferred welfare instrument for states.
Commission’s Key Recommendations for Fiscal Sustainability
To mitigate risks, the 16th Finance Commission has put forward several crucial recommendations:
- Implement periodic and rigorous reviews of all subsidy schemes to ensure benefits reach the most vulnerable.
- Rationalize the beneficiary base to prevent schemes from expanding into "large and untargeted beneficiary bases."
- Introduce clear sunset or exit clauses, especially for schemes providing subsidies on non-merit private goods and general unconditional transfers.
- Establish formal mechanisms for governments to regularly assess and adjust these subsidies.
The report underscores that such measures are essential not only to reduce revenue deficits but eventually eliminate them, ensuring long-term fiscal health for states.
