R. Suryamurthy
As India gears up for a series of assembly elections, social welfare spending by state governments is projected to remain elevated, reaching approximately 2% of their Gross State Domestic Product (GSDP) this fiscal year, or an estimated Rs 6.4 lakh crore. While aimed at socio-economic development, this surge in expenditure, particularly direct benefit transfers (DBT), is raising concerns among analysts at CRISIL Ratings regarding its potential impact on states’ financial flexibility and capital outlays.
The top 18 Indian states, collectively representing 90% of the nation’s aggregate GSDP, are expected to maintain social welfare spending at levels similar to the previous fiscal year. This marks a significant increase from the 1.4-1.6% of GSDP observed between fiscals 2019 and 2024.
Anuj Sethi, Senior Director, CRISIL Ratings, highlighted that social welfare expenditure is estimated to increase by roughly Rs 2.3 lakh crore from fiscal 2024 levels across fiscals 2025 and 2026. A substantial portion of this increase, around Rs 1 lakh crore, is attributed to DBT schemes primarily benefiting women, often linked to election commitments. The remaining Rs 1.3 lakh crore increase is directed towards financial and medical assistance for backward classes and social security pensions for specific groups like widows and the elderly, supporting essential socio-economic development.
The surge in social welfare expenses is not uniform, with about half of the analyzed states anticipating a significant increase, while others expect stable or modest growth. This uneven distribution suggests a targeted approach, likely influenced by upcoming electoral battles.
The fiscal implications are considerable. Overall revenue expenditure is budgeted to grow at a compound annual growth rate (CAGR) of 13-14% between fiscals 2025 and 2026. In contrast, revenue receipts grew at a slower ~6.6% year-on-year last fiscal and are projected to increase by only 6-8% year-on-year this fiscal. This widening gap is expected to keep revenue deficits elevated.
Aditya Jhaver, Director, CRISIL Ratings, cautioned that high revenue deficits typically compel state governments to reduce capital outlay to maintain fiscal stability. Last fiscal, capital outlay saw a meager 6% year-on-year growth, a stark contrast to the 11% CAGR over the preceding five years, as the revenue deficit ballooned by almost 90% year-on-year. “If this trend continues this fiscal, it could constrain states’ capital outlay, which has a higher multiplier effect and can stimulate increased investment in the economy,” Jhaver stated.
The timing of these increased expenditures, particularly the rise in DBT schemes, appears to be strategically linked to the electoral cycle. Several states that recently went to polls had already introduced or increased allocations to DBT schemes. With more assembly elections on the horizon, a further increase in DBT as part of election commitments remains a key monitorable for financial analysts.
While acknowledging the critical role of social welfare spending in socio-economic development, CRISIL Ratings emphasized that an increase in such allocations without a corresponding increase in revenue receipts could adversely impact the credit profiles of states in the long run. This underscores the urgent need for fiscal prudence amidst political imperatives. The balance between welfare objectives and fiscal health will be a defining challenge for state governments as they navigate the electoral landscape.
(R. Suryamurthy is a senior economic journalist based in Delhi.)