Targeting Failures in State Cash Transfer Schemes Carry Political and Fiscal Costs

Unconditional Cash Transfers (UCTs) are direct monetary payments to beneficiaries without requiring them to fulfil any specific behavioural condition. In India, state governments have used UCTs as a welfare instrument since the early 2010s, but the scale expanded sharply after 2020. Several states launched women-targeted UCT schemes, disbursing between ₹1,000 and ₹2,500 per month per beneficiary. By 2025-26, twelve states collectively spent an estimated ₹1.68 lakh crore on such transfers. This is nearly double the Union government's MGNREGA allocation of ₹86,000 crore in the same year.

The constitutional framework for welfare spending sits at the intersection of the Directive Principles of State Policy and the Seventh Schedule. Public health and social welfare are State List subjects, giving state governments primary responsibility. The Finance Commission determines the vertical and horizontal devolution of central taxes to states, shaping how much fiscal space each state has. States with high debt-to-GSDP ratios, Punjab at 46.4%, West Bengal at 38.9%, and Bihar at 36.8%, face the sharpest tension between welfare commitments and fiscal prudence. The RBI and the Axis Bank Institute for Competitiveness have both flagged that states finance UCTs through expenditure switching and higher deficits, risking crowding out of capital investment. This connects directly to the evolving pattern of Centre-State financial relations: as states take on larger welfare obligations, their dependence on central transfers and market borrowings grows, complicating the fiscal federalism framework that successive Finance Commissions have tried to stabilise.

The Economic Advisory Council to the Prime Minister (EAC-PM) published a Working Paper documenting positive welfare outcomes from UCTs in Maharashtra and Odisha, including improved household consumption, savings, and spending on health and education. The Ministry of Finance's Economic Survey estimated that states would spend approximately $18 billion on UCTs in 2025-26, much of it targeted at women. These schemes partially advance SDG 5.4, which calls for recognition of women's unpaid domestic and care work.