Cash Transforms Subsidy Landscape, Threatens State Finances: 16th Finance Commission Sounds Alarm
The 16th Finance Commission has issued a stark warning about the rapid expansion of unconditional cash transfer schemes across Indian states, highlighting that such programs now account for over one-fifth of all subsidy spending. In its report for the 2026–31 period, tabled in Parliament, the Commission chaired by economist Arvind Panagariya cautioned that this growing reliance on direct cash handouts could destabilize state finances if left unchecked.
Sharp Surge in Cash Transfer Spending
Across 21 states, large-group unconditional cash transfer schemes—which involve direct payments to beneficiaries without performance benchmarks or conditions on fund usage—now represent 20.2% of total subsidy spending in the 2025–26 Budget Estimates. This marks a dramatic increase from just 3% in 2018–19, indicating a fundamental shift in how states allocate welfare resources.
The Commission specifically identified BJP-ruled Maharashtra and Odisha, along with opposition-ruled Jharkhand, as states experiencing the steepest rise in such expenditures over the past two years. This trend has significantly reshaped subsidy spending patterns, moving away from traditional social security programs toward broader cash distribution initiatives.
Major Schemes Driving the Expansion
Currently, the largest cash transfer schemes include:
- Maharashtra's Majhi Ladki Bahin Yojana: Providing Rs 1,500 monthly to eligible women
- Karnataka's Gruha Lakshmi: Offering Rs 2,000 monthly to women heads of households
- West Bengal's Lakshmir Bhandar: Granting Rs 1,200 monthly for SC/ST women and Rs 1,000 for women from general categories
These programs exemplify the shift within unconditional cash transfers. While social security for pensioners and farmers accounted for 84% of such spending in 2018–19, large cash transfer schemes like those above now constitute nearly half (47.4%) of all unconditional transfers, surpassing both traditional categories by 2025–26.
Fiscal Implications and State-Specific Trends
Between 2018–19 and 2025–26, cash transfers recorded a trend growth of 53.6%, with total outlay projected to reach Rs 1.96 lakh crore in 2025–26. Notably, much of this expansion occurred after 2023–24, suggesting recent acceleration rather than gradual buildup.
State-level data reveals concerning patterns:
- Maharashtra: Spending on large-group cash transfers jumped from 0.6% of total revenue expenditure in 2023–24 to 6.2% in 2025–26 (Budget Estimates)
- Jharkhand: Such spending rose from 0.8% to 13% over the same period
- Odisha: Recorded a sharp increase from nil to 5.1% during this timeframe
The Commission warned that if major states continue allocating rising proportions of revenue expenditures to these transfers, they will impose significant budgetary burdens and potentially destabilize finances in the long run.
Underlying Factors and Political Context
The Commission attributed this shift partly to improvements in delivery systems, noting that while the Jan Dhan–Aadhaar–Mobile (JAM) trinity has reduced leakages and improved efficiency, it has also made cash payments to broad population groups a preferred welfare instrument for states.
In Maharashtra, the Maha Yuti government—led by BJP, Eknath Shinde's Sena, and Ajit Pawar's NCP—introduced the Majhi Ladki Bahin Yojana in July 2024. The scheme, providing Rs 1,500 monthly to eligible women, had reached 2.3 crore beneficiaries by January. Political observers note the scheme was introduced after the MahaYuti coalition faced setbacks in the 2024 Lok Sabha polls, with BJP and its allies attributing their subsequent Assembly election victory to this welfare initiative.
Commission Recommendations and Fiscal Concerns
The Finance Commission called for urgent reforms, including:
- Periodic and rigorous review of subsidies
- Rationalization of beneficiary bases
- Clear sunset or exit clauses for schemes
- Formal mechanisms to regularly assess subsidy effectiveness
The Commission emphasized that many subsidy schemes, particularly large unconditional cash transfers, have expanded into "large and untargeted beneficiary bases," making them inefficient and fiscally costly. Such programs not only impose substantial fiscal burdens but also crowd out capital expenditure and critical spending on basic services like education and healthcare.
Furthermore, the Commission cautioned against financing these schemes through off-budget borrowings, guarantees, or revenue assignments, describing such practices as "fiscally imprudent" due to the opacity they create in public accounts. It recommended discontinuing and actively discouraging these financing methods to ensure transparent and sustainable fiscal management.
The report stresses that review processes must ensure benefits reach the most vulnerable populations while helping reduce and eventually eliminate revenue deficits. As states navigate the balance between welfare delivery and fiscal responsibility, the Commission's warnings highlight the need for careful policy design and implementation to prevent long-term financial instability.
