State-led cash transfers are set to provide a durable cushion to low-income household consumption in 2026, even as inflation risks from high energy prices and El Nino persist, according to a research report by Crisil Ratings.

The report notes that the coverage and scale of these transfers have expanded sharply, but the rising fiscal burden on states poses a key risk for the bond market going forward.

The report said that 17 out of 28 states and the National Capital Region-Delhi will provide monthly cash transfers this fiscal, compared to just four states in 2019.

Targeted largely at women and farmers in rural and urban areas, the schemes require only income or landholding as eligibility and have become a recurring post-election promise.

Crisil estimates that for households in the bottom 20 per cent consumption segment, a median monthly transfer of Rs 1,500 covered 74 per cent of rural monthly expenditure and 51 per cent of urban expenditure in 2023-24, based on NSO's Household Consumption Expenditure Survey.

"When used fully for consumption, the additional income can lift a rural household from the bottom 5 per cent to the 30-40 per cent consumption fractile, and an urban household from the bottom 5 per cent to the 10-20 per cent fractile," Crisil said, adding that this enables greater spending on discretionary goods and better-quality essentials.

The Household Consumption Expenditure Survey shows that individuals in the 30-40 per cent fractile spend 49 per cent of their monthly expenditure on non-food items, compared with 45 per cent for the bottom 5 per cent.

"Some key welfare benefits by the Centre towards low-income households include free foodgrain cash transfer to farmers under PM Kisan and rural employment under VB-G RAM G scheme. Recent studies have suggested that cash transfers have wider positive consequences for family welfare. The adoption of digital public infrastructure for these transfers ensures better beneficiary reach," Crisil said in its report.

Studies cited by Crisil show broader benefits, including improved household savings, better food security, children's education, family health and women's decision-making power, which can translate into higher female voter participation.

"Moving up the consumption hierarchy can lead to increased consumption of discretionary goods and services or access to better quality essentials," the report said.

However, the report stressed that the fiscal cost to states is rising. Gross market borrowing by states jumped 15.2 per cent year-on-year to Rs 12.4 lakh crore in FY26, growing faster than the Centre's.

Of the 16 states offering cash transfers, 12 recorded double-digit growth in market borrowing this fiscal, a trend Crisil flags as a key concern for the bond market.

Crisil further noted that while cash transfers can act as a short-term buffer against economic stress, Crisil argues that improving income prospects is critical for sustainable growth in domestic demand.

Without stronger job creation and income growth, the consumption boost from transfers may remain limited to maintenance rather than expansion.

The report suggests that as more states adopt such schemes, balancing fiscal sustainability with welfare objectives will be crucial to prevent crowding out of capital expenditure and to maintain investor confidence in state finances.

Published on May 5, 2026