What looks like welfare is actually a self-reinforcing electoral auction where stopping means losing, borrowing funds the promises, and the bill lands on who was never on the beneficiary list.
Minaketan Mishra
In 2024-25, nine Indian states budgeted to collectively spend over ₹1 lakh crore on unconditional cash transfer schemes for women alone; up from just two states two years earlier. What appeared to be welfare is now actually something else entirely: a self-reinforcing electoral auction where stopping means losing, borrowing funds the promises, and the bill lands on the person who was never on the beneficiary list. Here is the economics behind it.
The freebie economy is not a welfare programme but a bidding war with no exit mechanism.
In Jharkhand 2024, the ruling JMM government launched Maiya Samman Yojana: a cash transfer of ₹1,000 per month for women. The BJP, reading the polling data, announced Gogo Didi Yojana at ₹2,100. The JMM called a cabinet meeting and raised its own scheme to ₹2,500. Three bids before a single vote was cast. Nomura, one of the world's largest financial institutions, called this pattern "competitive populism" in a December 2023 report — and noted it is not a left problem or a right problem. It is a system problem.
The Reserve Bank of India has a precise definition for what this produces: public welfare measures provided free of charge that lack any long-term developmental goal and are driven primarily by electoral considerations. In February 2026, the Supreme Court went further. In its ruling on TNPDCL, Chief Justice Surya Kant called it an "appeasing policy" — taxpayer money deployed not to build human capital but to win elections.
The distinction matters because welfare and freebies behave differently in an economy. Every rupee spent on infrastructure returns between two and four rupees of economic activity while every rupee spent on an unconditional cash transfer returns approximately eighty paise, less than one, with borrowed money.
Every state that made a promise had to find the money somewhere and the trail leads through three structural realities.
Before 2017, states could raise their own taxes: sales tax, VAT, octroi, entry tax. GST collapsed seventeen different levies into a single national framework. What remained for states to independently control: excise on alcohol, VAT on petrol, stamp duties on property. Three levers to fund schools, hospitals, salaries, infrastructure, and now an expanding list of election promises. According to PRS Legislative Research, 53% of state receipts in 2022-23 came from non-discretionary sources — outside the control of states entirely.
The pandemic collapsed GST collections nationwide. The compensation fund ran dry. States already stretched beyond capacity now had to borrow just to keep essential services running and that too before a single freebie was added to the bill.
In FY25, states financed 79% of their gross fiscal deficit through open market borrowings. Gross market borrowings of states surged 32.8% to reach ₹10.07 lakh crore in a single year. And where official balance sheets look almost fine, states have found a workaround — Special Purpose Vehicles and shell entities whose borrowings technically belong to a corporation but whose repayment the state government guarantees. The CAG has formally flagged this as a fundamental threat to fiscal transparency. In Kerala alone, off-budget borrowings of ₹32,942 crore were kept off the official state balance sheet.
The most extreme case is Punjab as Its debt-to-GDP ratio stands at 46.9%: more than double the FRBM recommended ceiling of 20%. Of every new rupee Punjab borrows today, 85 paise goes purely to servicing the interest on money it already borrowed. Before a single rupee reaches a school or a road.
The Economic Survey 2025-26 calls it a zero-sum choice. Every rupee committed to unconditional cash transfers is a rupee taken directly from capital expenditure. Both are not possible at current spending levels.
The data from the first ten months of 2025-26 makes this visible: states spent 68% of their revenue expenditure budget on cash transfers, salaries, pensions. While the Capital expenditure, the money that actually builds things, sat at 51%.
Two examples from the ground illustrate what 51% looks like in practice.
Andhra Pradesh's Amaravati capital city project: a ₹51,000 crore construction programme that stalled due to contractor payment delays and diesel shortages. The same state spends 30% of its total tax revenue on freebie schemes.
Telangana's MMTS Phase 2 metro rail expansion sits idle despite ready infrastructure. The state could not release ₹381 crore to fund it while spending ₹50,713 crore on welfare schemes the same year.
At ₹1.7 lakh crore annually, a decade of unconditional cash transfers represents ₹17 lakh crore in foregone infrastructure. The same money could build 52,000 kilometres of national highways, 1,133 AIIMS hospitals i.e. more than one for every district in India or fund the Jal Jeevan Mission nearly five times over.
The bill has three addresses.
The first address is the middle class, for the first time in India's post-independence history, personal income tax collections have overtaken corporate tax revenue. The salaried class now contributes more to the national tax base than corporations, the same class that does not qualify for most of these schemes.
The second address is electricity consumers. Karnataka raised tariffs by 40 to 45 paise per unit in April 2026 explicitly to compensate for losses created by its free electricity scheme. Uttar Pradesh proposed a 30% rate hike for urban consumers for the same reason. The subsidy for one group becomes the surcharge for another.
The third address is future generations. Every rupee borrowed today to fund an unconditional transfer is a rupee that future taxpayers will repay with interest while inheriting the infrastructure that was never built.
In April 2022, the exact week Sri Lanka was collapsing under the weight of its own fiscal promises, India's top bureaucrats sat with the Prime Minister for four hours. The attendees included National Security Advisor Ajit Doval, Principal Secretary PK Mishra, and Cabinet Secretary Rajiv Gauba.
Their warning, documented in reports by The Federal and Organiser: several Indian states could face a Sri Lanka-type economic crisis. Some of them, they said, would have already gone bust if they were not part of the Union.
Sri Lanka's collapse followed a familiar sequence. Election promises. Tax cuts that hollowed out the treasury. Subsidies with no revenue to back them. Government revenue fell from 12% of GDP to 8.2% in three years. Foreign reserves dropped from $7.6 billion in 2019 to less than $400 million by June 2022. The president fled the country.
India is not Sri Lanka. Its federal structure, central transfers, and RBI oversight provide buffers that Sri Lanka lacked. But the early signs the bureaucrats flagged in April 2022 — states borrowing to service previous borrowings, off-budget debt accumulating quietly, capital expenditure being the first casualty — are visible in the data today.
The freebie economy has a political economy trap built into its structure.
The transfers are real,for millions of families living on the edge, ₹1,000 or ₹2,000 a month is not just a mere statistic, It is groceries, It is a school fee, It is something that materially improves daily life and removing these transfers without replacing them with something better is not a policy option that wins elections and no party, regardless of its stated position on freebies, has demonstrated the ability to stop once the auction starts.
The risk is not that states collapse overnight. The risk is a slow, quiet fiscal deterioration where interest payments crowd out development spending year by year, where infrastructure falls further behind economic need, and where the middle class absorbs an increasing share of the tax burden while qualifying for decreasing benefits.
The DBT infrastructure India has built — ₹50.83 lakh crore transferred cumulatively, ₹4.31 lakh crore saved in leakage elimination — proves the pipes exist for a different approach. Brazil's Bolsa Família did it at 0.4% of GDP: conditional cash transfers tied to school attendance and health checkups reduced poverty from 36% to 21% in six years. India has more sophisticated delivery infrastructure than Brazil did when it launched Bolsa Família.
The question is not whether the infrastructure exists to do this differently, It does.
The question is whether the electoral system creates any incentive to use it differently and that is a question the data cannot answer.
We have also made a Video on this if you like to watch these type of content on a visual context: Why Freebies Are the New Democracy in India | BIGSTORY Network
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