The recent State Assembly elections have once again seen announcements of cash transfers, which has attracted the attention of economists. Such giveaways, or freebies, are considered a drain on the State exchequer. But, is there another side to this issue which we are missing?

Unlike the Centre, States are bound by fiscal deficit norms, usually 3-3.5 per cent of GDP. If this is higher at the time of announcement of their respective Budgets, States would have to seek the Centre or the RBI’s permission, anyway. Therefore, it is hard to say that overall fiscal ratios are breached by such expenditures.

Second, cash transfers in the form of direct payments or subsidies are implemented by both the Centre and States. In fact, the Centre has a larger budget and deficit ratio relative to States and hence can provide greater support through centrally sponsored schemes which involve food subsidy, cash payments to farmers, employment programmes, among others.

Capex trade-off

Third, critics bring up the trade-off between capex and revenue expenditure. Freebies are considered non-productive while capex generates future output by forging strong backward linkages with industries involved in supplying inputs.

Arguably, cash transfers are not really unproductive as the cash given is usually spent, since it is usually dispensed to the lower income groups. This adds to the consumption chain and drives the demand for goods and services.

A significant part of rural demand, which has supported growth in the consumer goods industry, can be attributed to such transfers. States also often give sewing machines, cycles, laptops to womenfolk, which spur demand in the industries concerned — just as construction of a road adds to demand for steel and cement.

Empowering women

Fourth, cash transfers are supposed to create a moral hazard, affecting the incentive to work. This argument may be weak because it has been seen that cash handouts to women help them to run their households. Further, free transport for girls and women empower them as it helps them attend school and commute to their place of work. Free transport prevents school dropouts especially in rural households. In rural areas, especially in the lower income groups, households do not want to invest in education for girls. Free transport enables such empowerment.

Fifth, the Centre runs a free food scheme which costs ₹2 lakh crore. This game-changing scheme has provided access to food and freed up money that can be spent on other goods and services.

The free food scheme has helped people rise above the poverty line. It has also spurred a shift in consumption pattern from food to non-food items, which is revealed in in the household consumption expenditure survey (also used for recalibrating the CPI index).

Sixth, the Centre has been running the rural employment scheme for over two decades with outlays of ₹80,000 crore to ₹1 lakh crore on an annual basis. The idea of the MGNREGA programme was to provide some employment to the farmers during the off-season. The high funds utilisation of the scheme is a pointer to the lack of job opportunities in rural areas.

The demand also perhaps shows that the trickle down approach, which is theoretically supposed to unfold as the economy grows, has not worked in the desired manner in the farm sector.

Seventh, direct cash transfers to targeted people are more beneficial than capital expenditure which benefits only the skilled force through the backward linkages. For example an outlay on a road increases demand for steel and cement which will increase demand for labour and result in higher employment in these sectors.

However, besides taking time to play out, the benefit of such spending goes mainly to those who have the skill sets to join this sector. Cash transfers are agnostic to the qualification of the recipient and only considers their income level.

Therefore, there are convincing arguments in support of government cash transfers. They directly help the targeted beneficiaries. They do not depend on other conditions working out as in the case of capex.

In fact if capex involves use of imported material, the benefit for domestic employment may be limited. The multiplier effects of capital expenditure may not always materialise. But cash transfers do benefit industries that see more demand from greater spending, leading to second-order investment opportunities.

Universal basic income

There is also a growing consensus over the need for a universal basic income, especially in developing countries. Cash transfers are definitely a step in providing a basic income especially for low-income households.

They are also a way of bringing about redistributive justice in a country with considerable inequality of income.

As long as these transfers are well targeted, they cannot really be regarded as objectionable. With the proliferation of digitization in the country, identification of the beneficiaries has become easier.

But the more crucial question is: for how long can the government provide such transfers? Until such time that the growth impulses are able to create more universal employment, such support will be required. But it is also true that such transfers can provide perverse incentives for not seeking work or education.

In the West, governments gave generous doles during Covid to people who had lost jobs. Now, it has become difficult to withdraw them and beneficiaries have stopped looking for work. This is a risk for sure, though in the near future it is not an issue for India, given the challenges in job creation at the lower level.

The writer is Chief Economist, Bank of Baroda. Views expressed are personal

Published on April 25, 2026