16th Finance Commission’s Warning On Rising Fiscal Risks

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• The 16th Finance Commission has cautioned states against the rapid expansion of large, unconditional cash transfer schemes, which now account for over 20% of total state subsidy spending. 

Understanding Cash Transfers in India

• Cash transfers have increasingly become a preferred welfare instrument in India’s public finance framework. 
• These transfers involve direct monetary payments to beneficiaries, usually deposited into bank accounts using the Jan Dhan-Aadhaar-Mobile (JAM) trinity. 
• They are broadly classified into conditional and unconditional transfers. While conditional transfers are linked to outcomes such as education or health, unconditional cash transfers impose no performance or usage conditions.
• Historically, unconditional transfers in India were limited to social security pensions and farmer income support schemes. 
• However, over the past decade, especially after improvements in digital delivery systems, states have expanded cash-based welfare to wider population groups. 
• This shift has altered the composition of state subsidies, raising questions about long-term fiscal sustainability.

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Trends in State Subsidies and Cash Transfers

• According to the 16th Finance Commission, large-group unconditional cash transfer schemes now constitute 20.2% of total state subsidy expenditure in the 2025-26 Budget Estimates, a sharp rise from just 3% in 2018–19. 
• This indicates a structural shift in how states allocate welfare spending.
• The Commission notes that while pensions and farmer support accounted for nearly 84% of unconditional cash transfers in 2018-19, their share has fallen significantly. 
• By 2025-26, large-group schemes alone account for 47.4% of all unconditional transfers, overtaking traditional categories. 
• This reflects a growing preference for politically visible, broad-based cash schemes over targeted or merit-based subsidies.

State-Level Patterns and Key Schemes

• The Commission highlighted Maharashtra, Odisha, and Jharkhand as states that have witnessed the steepest rise in such spending over the past two years. 
• Major schemes include:
  • Majhi Ladki Bahin Yojana (Maharashtra): Rs. 1,500 per month to eligible women.
  • Gruha Lakshmi (Karnataka): Rs. 2,000 per month to women heads of households.
  • Lakshmir Bhandar (West Bengal): Monthly transfers to women beneficiaries across social categories.
• In Maharashtra, spending on large-group cash transfers rose from 0.6% of total revenue expenditure in 2023-24 to 6.2% in 2025-26, while Jharkhand saw an increase from 0.8% to 13% over the same period. 
• Odisha recorded a jump from nil to 5.1%. These sharp increases indicate a rapid fiscal expansion rather than a gradual policy transition.

Fiscal Concerns Raised by the 16th Finance Commission

• The Finance Commission has warned that the unchecked expansion of unconditional cash transfers can destabilise state finances in the long run. 
• Such schemes impose a recurring fiscal burden and reduce flexibility in budgetary allocations. 
• The Commission observed that many of these transfers are poorly targeted, expanding into large beneficiary bases that dilute their redistributive effectiveness.
• A major concern is the crowding out of capital expenditure. Rising revenue spending on cash transfers limits states’ ability to invest in infrastructure, education, and health, which are critical for long-term growth. 
• The Commission also cautioned against financing these schemes through off-budget borrowings, guarantees, or revenue assignments, calling such practices fiscally imprudent due to reduced transparency in public accounts. 

Recommendations for Reform

• To address these risks, the 16th Finance Commission has recommended:
  • Periodic and rigorous review of subsidy schemes.
  • Rationalisation of beneficiary bases to ensure support reaches the most vulnerable.
  • Introduction of sunset or exit clauses, especially for non-merit and general unconditional transfers.
  • Discontinuation of off-budget financing mechanisms for welfare schemes.
• The Commission emphasised that welfare policies must align with fiscal responsibility and deficit reduction goals, rather than becoming permanent entitlements without review.

Source: IE