The Indian economy's freebie dilemma: A call for reform
The Economic Survey 2025-26 highlights a pressing issue: the unchecked rise of freebies provided by Indian state governments. These freebies, while seemingly beneficial, are draining public finances and widening deficits, leaving little room for investments in crucial areas like infrastructure and human capital. The survey urges policymakers to adopt outcome-linked, time-bound models, drawing inspiration from Brazil's successful Bolsa Familia program.
But here's the catch: freebies can have unintended consequences. They may discourage women from working, as cash support can replace the need for paid employment. The survey warns that the rising trend of freebies is delivering adverse economic costs, with unconditional cash transfers (UCTs) ballooning by over fivefold between FY23 and FY26, reaching an estimated Rs 1.7 lakh crore this year.
While these schemes provide immediate income relief and boost consumption, they fall short in delivering long-term gains in nutrition, education, and poverty reduction. Instead, they deepen revenue deficits, crowd out capital expenditure, and tighten states' fiscal flexibility. The survey emphasizes that the design of these schemes is a critical issue, as they are often unconditional, untethered from employment or skill training, and lack sunset clauses, turning short-term relief into permanent fiscal liabilities.
The fiscal consequences are evident: aggregate spending on UCTs has reached Rs 1.7 lakh crore in FY26, ranging from 0.19% to 1.25% of states' GSDP and up to 8.26% of their budgetary outlays. This has led to revenue deficits and increased borrowing for consumption rather than asset creation. The states' combined fiscal deficit has risen, and revenue deficits have widened, indicating rising stress on state finances.
The survey argues that these freebies directly crowd out capital spending on essential sectors like health, education, transport, and urban infrastructure, which are vital for medium-term growth and productivity. It highlights a concerning aspect: unconditional income support may reduce women's incentives to enter or remain in the workforce, especially when transfers dominate household income.
To address this dilemma, the survey proposes a shift towards conditional, time-bound welfare. It suggests adapting successful models from other countries, such as Brazil's Bolsa Familia, Mexico's Progresa/Oportunidades, and the Philippines' Pantawid Pamilyang Pilipino Program. These programs tie cash transfers to verifiable conditions, ensuring accountability and promoting education, health, and human capital development.
The key takeaway is that welfare spending must complement investments in skilling, nutrition, and infrastructure. The survey recommends redesigning freebies with clear conditions, time limits, and outcome-linked evaluations, incorporating sunset clauses and periodic audits to prevent fiscal burden permanence. By doing so, India can make freebies more effective and sustainable, ensuring a balanced approach to economic development.
