Cash transfer schemes of states huge fiscal red flag

The 2025-26 Economic Survey released on January 29 underlined the need for fiscal discipline by state governments, whose recent uptick in debts and deficits, along with ballooning unconditional cash transfers (UCTs), could increase borrowing costs for governments across levels despite the discipline shown by the central government.

- Abhishek Jha

The survey noted that while the combined fiscal deficit of states has decreased from the spike seen during the pandemic, it has inched up in recent years. Not all debts and deficits are necessarily bad. Those used for capital creation can increase productivity of the economy. However, even the revenue deficit ~ this leads to borrowing for spending that does not create assets -- of states has inched up. This problem is compounded by the fact that the revenue spending is getting oriented towards UCT, which lack sunset clauses or reviews.

This can make revenue spending rigid, which affects flexibility towards capital spending in the medium term. Such indiscipline can increase borrowing costs across levels of government because markets do not price central and state government debt separately, but in a consolidated manner, the survey said. What is even more troubling at the moment is the fact that the debt-issuing mechanism does not differentiate between states which are being prudent and profligate, the survey said.