Rise of cash transfer schemes by Indian states

Source: The post rise of cash transfer schemes by Indian states has been created, based on the article “Cash transfers must not lead states to fiscal ruin” published in “Live mint” on 24th December 2024

UPSC Syllabus Topic: GS Paper3 – Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context: The article discusses the rise of cash transfer schemes by Indian states, driven by political motives and economic stress. It highlights fiscal risks, lack of uniform eligibility checks, corruption, and the need for studies on their impact and sustainability.

For detailed information on Direct Benefit Transfer (DBT) read this article here

Why Are States Cash Transfers Increasing?

1. The Reserve Bank of India (RBI) criticized states for increasing subsidies and cash transfers, especially to farmers, women, and youth.
2. Nine states allocated ₹1 trillion for cash transfers to women in 2024-25 budgets, with actual spending likely exceeding ₹1.5 trillion (PRS Legislative Research).
3. Political parties, regardless of their ideologies, are using these schemes for electoral gains.

What Are the Key Features of This Trend?

1. Political Motivation:

• Political parties compete to introduce more cash transfers for votes.
• Even fiscally conservative parties, like the ruling BJP, have adopted these schemes.
• Examples include elections in Maharashtra, Jharkhand, and Madhya Pradesh, where cash transfers influenced outcomes.

2. Economic Necessity:

• Cash transfers address declining real wages and high unemployment.
• They temporarily boost consumption and support weak consumer demand.

How Do Cash Transfers Differ From Universal Basic Income (UBI)?

1. Unlike UBI, cash transfers lack a formal policy framework.
2. There is no consistent means-testing, leading to eligibility issues and corruption.
3. Some schemes exclude government employees and taxpayers, but enforcement varies.

For detailed information on Benefits and Criticisms of Universal Transfers read this article here

What Are the Risks of Growing Cash Transfers?

1. Fiscal profligacy can crowd out developmental spending.
2. The RBI warns that subsidies and cash transfers may harm long-term economic productivity.
3. Increasing spending on cash transfers could hurt India’s fiscal stability and global credit ratings.

Are Cash Transfers Effective Politically or Economically?

1. There is no evidence that cash transfers guarantee votes.
2. Political parties need studies to assess their return on investment.
3. Without better planning, these schemes may lead to a fiscal race-to-the-bottom.

Conclusion

India needs stricter eligibility criteria, corruption control, and detailed studies to balance fiscal sustainability with short-term economic benefits from cash transfers.

Question for practice:

Discuss the political and economic factors driving the rise of cash transfer schemes in Indian states and their associated risks.