The Great Welfare Debate: Freebies vs Fiscal Responsibility
Prime Minister Narendra Modi recently sparked a national conversation. He compared excessive welfare schemes to a "revdi culture." This term refers to the practice of distributing freebies that strain state finances. Courts have also voiced concerns. They warned that indiscriminate freebies might discourage work and distort electoral fairness.
Political Battleground: Bihar and Tamil Nadu
Opposition parties in Bihar made a specific accusation. They called a one-time government dole of ₹10,000 an electoral handout. This payment happened close to the polls. Meanwhile, in Tamil Nadu, a different story unfolds. Supporters of welfare-led governance point to clear benefits. They argue sustained public spending on welfare has reduced social fragmentation. This includes divisions across caste, religion, and gender. Importantly, they claim this spending contributes positively to the state's economic performance.
The Scale of Subsidy Spending
Various governments have significantly expanded subsidy spending over the years. These welfare schemes receive many labels. Critics call them fiscally irresponsible. Proponents see them as necessary for ensuring minimum standards in essential services.
The Centre provides subsidies in key areas:
- Power
- Food
- Fertiliser
- Fuel
States offer support in even broader domains:
- Food
- Electricity
- Transport
- Health
- Education
- Nutrition
- Agriculture
Sometimes, states run these programs in partnership with the Centre. Together, these interventions form a massive share of public expenditure.
The Economic and Political Rationale
The economic argument for subsidies is straightforward. They correct market failures in essential services. Poor households often under-consume crucial services like education, healthcare, and food security. Subsidies aim to bridge this gap.
Political considerations also play a huge role. Voters demand immediate benefits. Long-term structural challenges like poverty and unemployment resolve slowly. This dynamic pushes politicians to offer tangible subsidies.
Targeted schemes for women, farmers, youth, and senior citizens have proliferated. Tamil Nadu exemplifies this trend. This push has dramatically increased total subsidy expenditure. Across states and Union Territories, spending jumped from ₹1.87 lakh crore in 2018-2019 to ₹4.72 lakh crore in 2024-2025. This figure represents nearly 10% of states' revenue expenditure.
State-by-State Spending Patterns
Among 20 major states, Maharashtra recorded the highest subsidy expenditure. It spent ₹66,260 crore in 2024-2025. Tamil Nadu followed closely at ₹52,603 crore.
On a per capita basis, a different leader emerges. Karnataka leads with ₹7,465 per person. Tamil Nadu comes second at ₹6,812 per person. At the lower end, Assam and Kerala report the lowest per capita spending. Assam spends just ₹120 per person, while Kerala spends ₹414.
The Fiscal Conundrum: Debt and Subsidies
Rising subsidy commitments coincide with growing state debt. Despite strong Gross State Domestic Product (GSDP) growth, liabilities have climbed. Tamil Nadu's outstanding liabilities reached ₹7.58 lakh crore in March 2024. Karnataka's liabilities stood at ₹5.9 lakh crore for the same period.
A fascinating pattern emerges when comparing per capita income and subsidy spending. Richer states tend to spend more per capita on subsidies. This might link to higher inequality or a large absolute number of poor people. Intense political competition could also drive the expansion of freebies, regardless of economic need.
More strikingly, a paradox appears. Per capita subsidy rises as poverty declines. States with relatively low poverty spend disproportionately more. For example:
- Tamil Nadu has a poverty ratio of 1.43%.
- Karnataka's ratio is 5.67%.
- Maharashtra's is 5.48%.
These states spend more than comparable states. This suggests electoral incentives, not economic necessity, often drive subsidy allocation. This raises serious concerns about long-term fiscal sustainability.
The Tamil Nadu Model: A Case Study
Supporters of Tamil Nadu's welfare-centric model defend it vigorously. They say it has contributed directly to the state's economic performance. This holds true where spending is applied judiciously. Key areas include education, health, and social protection.
On the fiscal side, the state's outstanding liabilities remain within limits. The 15th Finance Commission set these limits. The government has also budgeted to reduce the fiscal deficit. It aims for 3% of GSDP in 2025-2026. However, a revenue deficit exceeding 1% of GSDP remains a concern. The state continues borrowing to fund recurring expenditure, including unconditional cash transfers.
The Shift to Direct Benefit Transfers (DBT)
States are changing how they deliver welfare. Many are shifting from in-kind subsidies to Direct Benefit Transfers (DBTs). Under DBT, cash is deposited directly into beneficiaries' bank accounts. Some states have even attempted similar experiments within the Public Distribution System (PDS).
Proponents argue DBTs improve welfare delivery through several mechanisms:
- Better targeting of vulnerable groups
- Provision of immediate liquidity
- Reduction of administrative costs
- Lowering of leakages, corruption, and rent-seeking
- Enhancement of fiscal transparency
However, the effectiveness of cash transfers remains contested. This is especially true for schemes like the PDS. Governments and political parties increasingly find DBTs politically convenient. Cash transfers allow visible and direct benefits to targeted voter groups.
This approach gained momentum after economists promoted it. They saw cash transfers as a solution to leakage-prone welfare systems. Inspiration came from Latin America and other developing countries.
The Proliferation of Cash Transfers for Women
Consequently, cash transfer schemes targeted at women have multiplied. Currently, 14 states operate such schemes. They use labels like economic support, financial inclusion, or empowerment. Assistance ranges from ₹1,000 to ₹2,500 per month. Some states offer one-time payments up to ₹10,000, as seen in Bihar.
Although framed as empowerment measures, timing is telling. Many schemes were introduced just before major elections. The explicit aim often involves securing women's votes, a decisive electoral bloc.
Assessing the Impact: Savings and Spending
Quantitative assessments show some positive trends. From 2009 to 2024, cumulative savings from reduced leakages amounted to ₹3.48 lakh crore. Subsidy spending as a share of total government expenditure declined from 16% to 9%. Simultaneously, beneficiary coverage expanded nearly 16-fold.
Yet, a recent report highlights a substantial commitment. Twelve states plan to spend ₹1.68 lakh crore in 2025-2026 on unconditional cash transfers to women.
Good Subsidies vs. Bad Subsidies
Not all subsidies are created equal. Their economic impact varies widely.
Good subsidies share common traits:
- They are well-targeted.
- They enhance human capabilities.
- They support vulnerable groups without distorting markets.
Bad or poorly designed subsidies create problems:
- They distort prices.
- They encourage dependency.
- They fail to improve productivity.
Such subsidies can have severe consequences:
- Discouraging labour force participation if not linked to skills or employment
- Entrenching intergenerational dependence
- Reducing fiscal space for development expenditure
- Crowding out capital investment
- Increasing public debt as states borrow for recurring welfare
Universal cash transfers might also fuel localized inflation. This happens if supply fails to keep pace with rising demand.
The Politics of Populism
Despite these risks, political parties often extend benefits universally. The goal is to maximise electoral gains, not to target specific groups for clear economic objectives. In this process, accountability and sound economic rationale are frequently compromised.
A conceptual distinction exists between essential, productivity-enhancing subsidies and electorally motivated freebies. However, this distinction is increasingly blurred. Competitive populism has become the norm. Short-term electoral success is often prioritised over long-term fiscal discipline.
The Path Forward
The goal should not be to eliminate subsidies entirely. Instead, the focus must shift to ensuring they are:
- Targeted to reach those most in need.
- Efficient in their delivery and impact.
- Transparent in their operation.
- Aligned with long-term development priorities.
- Financed through sustainable revenue sources, not excessive borrowing.
The debate between welfare and fiscal health is complex. It requires careful balancing. States must support their citizens without jeopardizing their economic future. The choices made today will shape India's fiscal landscape for years to come.
