The Freebie Illusion
If you pay income tax in India, it is easy to assume your taxes directly fund the wave of
election-time promises, free electricity, cash transfers, loan waivers, laptops and other
benefits.
But India’s fiscal system is far more complicated.
States finance spending through taxes, transfers from the Centre, non-tax revenue and
borrowing. And while welfare schemes can be legitimate public policy, rising unconditional
transfers can reduce the fiscal room available for other priorities.
PRS notes that an increasing number of states have introduced unconditional cash-transfer schemes, affecting their ability to spend on other development priorities.
The Debt Behind the Promise
The uncomfortable question is:
What happens when governments promise benefits that their recurring revenues cannot
comfortably support?
The answer can be borrowing.
RBI has repeatedly highlighted the importance of fiscal prudence, debt consolidation and
greater transparency around state liabilities and off-budget borrowing.
But it would be misleading to say that India’s entire welfare system is simply being funded
through debt. Aggregate state finances remain relatively stable, although fiscal pressures
and high debt burdens persist in several states.
Welfare ≠ Freebies
This distinction matters.
Welfare can create long-term economic value:
Primary education
Public healthcare
Nutrition programmes
Targeted income support
Basic food security
These can strengthen human capital and protect vulnerable households.
A politically motivated benefit with little long-term economic return is a different question.
The real debate isn’t:
“Should governments spend money on people?”
It is:
“What should governments spend it on and can they afford to sustain it?”
The DBT Revolution
Direct Benefit Transfer has transformed how welfare reaches citizens.
By using digital identification and bank-account infrastructure, DBT can reduce leakages
and ensure benefits reach intended recipients more directly.
But the same infrastructure also makes large-scale cash-transfer programmes easier to
administer.
That creates an important policy challenge:
Efficiency in delivering a benefit does not automatically make the benefit fiscally
sustainable.
The Competitive Welfare Race
This is where electoral incentives enter the equation.
If one political party promises ₹2,000 a month, another may have an incentive to promise
₹2,500.
The result can become a form of competitive welfare where governments compete not
only on infrastructure, jobs and public services, but also on the size and visibility of direct
benefits.
That doesn’t make every such programme illegitimate.
But it does raise the question of whether voters are being offered productive public
investment or increasingly expensive recurring commitments.
Where the Math Gets Difficult
State finances are not uniformly collapsing.
In fact, the combined fiscal deficit of Indian states remained below 3% of GDP for most
years between 2017-18 and 2023-24, before rising to about 3.3% in 2024-25.
At the same time, PRS estimates that states collectively budgeted a fiscal deficit of 3.2% of
GSDP for 2025-26, with several states above the 3% benchmark.
So the problem isn’t that every state is financially broken.
It’s that fiscal space differs dramatically across states, and recurring commitments can
become particularly difficult for states with weaker revenue bases.
Free Electricity Has a Cost
Power subsidies provide a good example.
Keeping electricity affordable can be socially valuable. But if subsidies become structurally
large, they can put pressure on state budgets and electricity distribution companies.
For example, Uttar Pradesh’s power subsidy rose from ₹10,070 crore in 2018-19 to ₹19,095
crore in 2024-25.
The economic question is therefore not simply:
“Is electricity free?”
It is:
“Who ultimately pays for it?”
Taxpayers? The state budget? The electricity distribution company? Borrowers? Or future
taxpayers?
The Opportunity Cost
Every rupee has an alternative use.
Money spent on a recurring subsidy cannot simultaneously be spent on:
Roads
Irrigation
Hospitals
Schools
Public transport
Water infrastructure
Productive capital investment
This doesn’t mean subsidies are automatically wasteful.
It means governments must compare immediate consumption with long-term economic
returns.
India’s Bigger Challenge
The strongest argument isn’t that India should eliminate welfare.
It is that India needs to distinguish between:
Welfare that builds capacity
And
Spending that primarily creates short-term political gratification.
The RBI has specifically recommended stronger fiscal frameworks, debt-consolidation
paths and greater transparency around government liabilities.
And the Centre has continued to emphasise capital expenditure; for example, the 2026-27
Union Budget allocates substantial resources to asset creation.
The Real Question
There is no simple “freebie = debt” equation.
Some welfare programmes are essential. Some subsidies can be economically justified.
Some cash transfers may protect households during difficult periods.
But recurring promises without a credible funding strategy can eventually squeeze the very
investments that create future growth.
So the question India should be asking isn’t:
“Are freebies good or bad?”
It is:
“Where should India draw the line between welfare, fiscal responsibility and electoral
incentives?”
Because ultimately, there is no free lunch in economics. Someone always pays.
INDIA’S “FREEBIE” ECONOMY: WHO REALLY PAYS?
