India’s freebie economy: When welfare becomes a fiscal ponzi

Government welfare schemes are certainly not Ponzi, which literally requires new investors’ money to pay earlier investors. Governments possess taxation powers and can legitimately borrow against future revenues. But when political commitments made purely for electoral purposes lead to recurring expenditure with insufficient recurring revenues that compel a state to borrow recklessly, the distinction tends to get blurred. Government must provide subsidies to the needy, but when a subsidy becomes an unconditional entitlement with little measurable developmental return, freebies deviate from genuine welfare. They also crowd out growth-enhancing capital expenditure. Without careful targeting, sunset clauses, transparent subsidy accounting, outcome-based transfers, and stronger fiscal rules, it becomes a one-way journey toward financial bankruptcy for reasons of political economy. Besides, once a benefit is given, withdrawing it becomes politically impossible, producing a ratchet effect in which moving upward is easy but moving down becomes difficult.

The Economic Survey 2025-26 noted that unconditional cash transfers (UCTs) have expanded rapidly across states and now form a growing share of their welfare spending. States spent Rs 1.7 lakh crore on UCTs during FY26, and the number of States implementing them has increased more than fivefold between FY23 and FY26, with half of the states running deficits in their revenue accounts. They now account for 1.25 per cent of state GSDPs and 8.26 per cent of state budgets. Competitive populism today is transforming welfare into an entitlement treadmill-with every election, the baseline moves up, while the revenues needed to finance it remain uncertain. Eventually, it becomes a redistribution financed by future taxpayers. In West Bengal, the BJP has raised the UCTs for women (Annapurna scheme) to Rs 3000 per month from the TMS’s Rs 1500 (Rs 1700 for SC/ST). It’s unlikely that any future Government would reduce the amount.

It is not that UCTs are always useless. The Economic Survey itself cites a study highlighting that UCTs constitute 40-50 per cent of the monthly per capita consumption expenditure (MPCE) for at least half of the rural population in seven States. For female casual and self-employed workers, they constitute significant shares of their monthly income. The question confronting us today is when does legitimate social protection cease to be welfare and become fiscally unsustainable populism? A subsidy may be expensive but politically defensible despite the economic distortion it causes. But it becomes indefensible only when the social return on the marginal rupee spent on it falls below the return available from alternative uses of that rupee. In other words, the question that we should ask is:” Does the next Rs 10,000 crore spent on the Annapurna scheme generate greater social value than the next Rs 10,000 crore spent on health, education, infrastructure, or employment creation?”

Freebies today have become so deeply embedded in our political economy that it is unrealistic to expect any more PILs or media campaigns to reverse the increasing competitive populism between political parties. A pragmatic course, therefore, would be to make them fiscally responsible and socially productive instead of wasting our energies to eliminate them. Several states are facing deep fiscal stress due to these, which are impacting their growth. States spend over 60% of their revenue expenditure on salary, pension, interest payments,and subsidies; many are financing their revenue deficits through borrowing, further curtailing the scope of growth-enhancing capex. Every freebie announced before an election is a committed expenditure that creates new permanent spending commitments without establishing permanent revenue streams to finance them. While the political dividends from them are immediate, the fiscal cost of financing them through borrowing is dispersed over the future.  The risk gets multiplied when Governments resort to off-budget borrowings to conceal their true cost. A welfare state becomes fiscally dangerous when today’s politicians promise benefits whose costs are to be borne by tomorrow’s taxpayers, and the future capital investments that would make tomorrow’s economy richer are sacrificed to finance today’s political competition.It is nothing but a Ponzi-like fiscal dynamic. Hence, every political party must justify the cost of such subsidies.

A subsidy may be socially defensible when the benefits it generates, like higher incomes, better health, reduced vulnerability, etc., are greater than its direct fiscal costs and the opportunity cost of the public resources committed to it. When the recurring fiscal cost of maintaining the benefit exceeds the additional social value it generates, particularly when financed by borrowing, it becomes problematic. This can be integrated into a simple Net Social Value (NSV) framework by defining NSV = Present value of measurable social benefits — Present value of fiscal costs — Opportunity cost of displaced public expenditure. A positive NSV would be a necessary condition for a promised subsidy, but the state must still possess the recurring revenue capacity to finance it without undermining fiscal stability or resorting to borrowing. Every major recurring subsidy promised in an election manifesto must therefore be accompanied by a standardised fiscal and social-impact statement covering at least six parameters: targeting, fiscal cost and non-debt financing mechanism, opportunity cost, net social return, sunset clause, and evaluation. Political parties should have no ground to object to such an architecture. The question is one of enforcement, and we have already travelled some distance in this direction.

In 2013, in the S Subramaniam Balaji v State of Tamil Nadu case, the Supreme Court held that promises of freebies made by political parties were not “corrupt practices” under the Representation of the People Act, 1951, while observing that freebies can influence voters and “shake the root of free and fair elections.” It directed the Election Commission of India (ECI) to frame suitable guidelines for political parties. The ECI subsequently incorporated manifesto-related provisions into the Model Code of Conduct. However, these guidelines were relatively weak: they required parties to explain the rationale for promises and indicate broadly how they proposed to finance them, but there was no effective mechanism for verifying the fiscal claims or enforcing the promises. In 2022, the ECI proposed a standardised disclosure proforma for election promises to all political parties, requiring them to provide information to voters on the physical coverage and financial implications of each promised scheme, the proposed sources/methods of financing, and the likely implications for fiscal sustainability of the Government. Parties naturally objected, arguing that deciding Government expenditure was an issue for the electorate and the political process, not the ECI. ECI, nevertheless, introduced the pro forma, which remained on paper only, as there was no enforcement architecture under which a party could be disqualified or penalised for non-compliance. Subsequently, the ECI itself maintained that it could not regulate the substance of Government policy. 

This is where the next reform should begin. The Supreme Court and the ECI now need to revive that mechanism that has remained a non-starter so far and make it mandatory for the parties to follow the fiscal and social impact statement as discussed above. This may fundamentally change the existing political calculus and move the parties towards fiscal accountability.

The author, a former Director General of the CAG of India, is a visiting professor at IIM Calcutta; Views presented are personal.