According to the Economic Survey for 2025–2026, “the expansion of unconditional cash transfers across several States has contributed to rising revenue expenditure, with implications for fiscal space and public investment at the state level,” even though the Center has achieved fiscal consolidation alongside record public investment.
Economic Survey Warning on State Cash Transfers
Rising revenue deficits and unconditional cash transfers in several States pose emerging risks by crowding out growth-enhancing spending.
Chief Economic Advisor V Anantha Nageswaran stated in the press conference following the survey that the unconditional fiscal transfers that numerous governments are seeking are highly beneficial as a short-term loan. “There is no doubt that they boost the public’s spending power, disposable income, and disposable income. But maintaining growth would necessitate a careful reordering of priorities to prevent short-term income support from undermining the very investments that are ultimately the foundation of inclusive medium-term prosperity.”
State Fiscal Deficit Trends Post-Pandemic
According to the Survey, the total State Government budget deficit as a percentage of GDP has, on average, stayed relatively consistent throughout the post-pandemic period at roughly 2.8%, which is comparable to pre-pandemic levels. However, state deficits have steadily increased over the last three years to 3.2%, suggesting new constraints on state finances, following the dramatic reversal from the pandemic-induced jump of about 3.9%.
According to the survey, 18 states experienced a decline in their revenue balances between FY19 and FY25. Of these, 10 experienced a decline from revenue surplus to revenue deficit, 5 experienced a worsening of their revenue deficit, and 3 were able to maintain revenue surplus despite the decline.
Revenue Deficits and Spending Pressures
All states saw a 40 basis point increase in the revenue deficit between FY24 and FY25. According to the Survey, “lagging revenue growth compared to nominal GDP growth has been a primary driver of this renewed fiscal stress, aggravated by the incurring of expenditures such as discretionary unconditional cash transfers.”
According to the Survey, bad fiscal discipline at the state level can no longer be considered “locally controlled” because it progressively affects the cost of sovereign borrowing. This is because Indian government bonds are now globally indexed and investors are evaluating general-government finances.
📉 State Cash Transfers & Fiscal Stress
- Key Issue: Rising unconditional cash transfers
- Impact: Higher revenue expenditure
- Risk: Reduced fiscal space for public investment
- Affected Area: Infrastructure, education, healthcare
- Survey View: Growth-enhancing spending being crowded out
Despite having the same BBB credit rating, Indonesia’s 10-year bond rate is 6.3%, whereas India’s is 6.7%. According to the Survey, “States’ fiscal goals, possibly, are casting a shadow on the sovereign’s borrowing cost, as investors focus on the fiscal parameters of the general government rather than merely those of the Union government.”
Furthermore, it stated that the long-term economic consequences of the subtle influence that unconditional fiscal transfers have on the incentives for self-improvement, upskilling, and employability might be more substantial.
⚠️ Sovereign Borrowing Cost Risks
- Investor Focus: General government finances
- India 10-Year Yield: 6.7%
- Indonesia 10-Year Yield: 6.3%
- Credit Rating: Both BBB
- Concern: State-level fiscal discipline impacting sovereign rates
Central Government Fiscal Performance
The central government’s budgetary health has received three sovereign rating upgrades this year, according to the Survey, which noted that its trajectory stands out for combining consolidation with ongoing public investment.
Effective capital expenditure as a percentage of GDP rose from approximately 2.6% to 4.0% between FY20 and FY25, while the share of capital spending in total central government expenditure climbed from approximately 12.5% to 22.6%.
“The central government is still well on track to accomplish its intended fiscal consolidation path, which aims to reach a budget deficit target of 4.4% of GDP by FY26, based on the general patterns seen throughout the year. According to the Survey, the union government’s budgetary deficit was 62.3% of the budget estimates as of November 2025.
Frequently asked questions
1. Why does the Economic Survey caution against states making unconditional cash transfers?
Due to the fact that unconditional cash transfers raise revenue expenditures without producing long-term assets. As a result, there is less money available for public investments in infrastructure, healthcare, and education—all of which are essential for long-term economic success.
2. After the pandemic, how are state finances doing?
State fiscal deficits have begun to rise once more, from roughly 2.8% of GDP to 3.2%, although initially declining following the epidemic increase. Many states’ revenue deficits have gotten worse, a sign of mounting financial strain.
3. How do fiscal problems at the state level affect India’s borrowing costs?
Investors from throughout the world now evaluate the finances of the entire government, not just the Center. As evidenced by India’s higher 10-year bond yield when compared to peers like Indonesia, states’ lack of fiscal restraint may increase India’s government borrowing costs.
4. Do cash transfers have a negative impact on the economy?
No. The Survey acknowledges that, in the short term, cash transfers increase disposable income and consumption. Overuse, however, can be detrimental to long-term growth if it discourages investment and lowers incentives for employment and skill development.
5. How does the fiscal situation of the federal government differ from that of the states?
The Center has effectively blended increased capital spending with fiscal consolidation. Significant increases in capital spending improved growth prospects and earned India many sovereign rating upgrades.
Conclusion
According to the Economic Survey 2025–2026, unconditional cash transfers and mounting revenue shortfalls are the main causes of the state’s financial imbalance. Although these transfers offer temporary respite, relying too much on them runs the danger of eroding long-term growth incentives, raising borrowing costs, and undercutting public investment.
On the other hand, the Central Government’s emphasis on capital expenditure and budgetary restraint provides a more sustainable growth strategy. In order to balance welfare goals with investment-led economic development, states will need to carefully reorder their expenditure priorities going forward.
Disclaimer:
This article is for informational purposes only and does not constitute financial, investment, or policy advice. Readers should consult official sources or professionals before making any decisions based on this information.
