R. Suryamurthy
As India enters a critical phase with several assembly elections on the horizon, state governments are ramping up their social welfare spending, projected to reach around 2% of their Gross State Domestic Product (GSDP) this fiscal — an estimated ₹6.4 lakh crore. Though aimed at promoting socio-economic welfare, this elevated expenditure, particularly through direct benefit transfers (DBTs), is raising red flags about its impact on states’ financial flexibility and capital investments, according to analysts at CRISIL Ratings.
The 18 leading states, which together account for 90% of the country’s total GSDP, are likely to sustain social welfare spending at similar levels to last year. This marks a sharp rise from the 1.4–1.6% of GSDP observed during the fiscals from 2019 to 2024.
Anuj Sethi, Senior Director at CRISIL Ratings, noted that social sector spending is expected to rise by nearly ₹2.3 lakh crore over fiscals 2025 and 2026 compared to 2024 levels. Of this, about ₹1 lakh crore is linked to DBT schemes, primarily aimed at women, often introduced as part of electoral promises. The remaining ₹1.3 lakh crore will go towards financial aid for backward classes and pensions for vulnerable groups such as widows and the elderly — forming a core component of the social safety net.
However, the increase in social spending is not uniformly spread. Roughly half of the states under review anticipate significant jumps in expenditure, while the rest expect either stable or only moderate growth. This divergence suggests a politically strategic deployment of welfare funds in states with upcoming elections.
The fiscal ramifications are considerable. Revenue expenditure is budgeted to grow at a compound annual growth rate (CAGR) of 13–14% over fiscals 2025 and 2026. In contrast, revenue receipts grew by only 6.6% year-on-year last fiscal and are expected to grow by just 6–8% this fiscal. This imbalance is likely to keep revenue deficits elevated.
Aditya Jhaver, Director at CRISIL Ratings, warned that persistently high revenue deficits often force states to trim capital expenditure to preserve fiscal balance. Last fiscal, capital outlay growth slowed to just 6% year-on-year — far below the 11% CAGR seen over the preceding five years — as revenue deficits swelled by nearly 90%. “If this pattern persists, it could restrict capital outlays, which generally yield a stronger multiplier effect and are essential for stimulating private investment,” Jhaver said.
Much of the rise in DBT schemes appears closely tied to the electoral calendar. Several states that recently held elections had already boosted allocations to DBTs. With more state elections approaching, analysts anticipate further expansions in such schemes, making them a key trend to monitor.
While CRISIL acknowledges the pivotal role of welfare spending in advancing social development, it cautions that rising allocations without matching growth in revenue could erode the long-term creditworthiness of state governments. As elections draw near, striking a balance between social commitments and fiscal discipline will be a key challenge for policymakers.
