Economic Survey flags concerns over fiscal populism in states

New Delhi: Concerns over fiscal populism, the crowding out of capital expenditure by cash transfers and the rise of revenue deficits in states have increased in recent times, the Economic Survey said on Thursday as it stressed that any fiscal indiscipline at the state level casts a shadow on the sovereign borrowing costs.

"While the Centre has achieved consolidation alongside record public investment, rising revenue deficits and unconditional cash transfers in several States pose emerging risks by crowding out growth-enhancing spending," the pre-Budget document tabled in Parliament said.

Among other elements, it mentioned that Unconditional Cash Transfers (UCTs) have expanded rapidly across several states and now form a growing share of state-level welfare spending.


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Aggregate spending on UCT programmes, particularly for women, is estimated at around Rs 1.7 lakh crore for FY26.

With Indian government bonds now globally indexed and investors increasingly assessing general-government finances, the Survey said weak fiscal discipline at the state level can no longer be treated as locally contained; it increasingly affects the cost of sovereign borrowing.

According to the Survey, concerns over fiscal populism, the crowding out of capital expenditure by cash transfers and the rise of revenue deficits in states have increased in recent times.

"From a macro perspective, any fiscal indiscipline at the state-level also casts a shadow on the sovereign borrowing costs. With markets pricing government debt on a consolidated basis, persistent revenue deficits or an expansion of committed expenditures at the state-level could affect sovereign bond yields," the Survey said,

It also emphasised the importance of coordinated fiscal discipline across levels of government, where fiscal policy is oriented toward expanding productive capacity and income growth rather than creating permanent expenditure commitments.

"Strengthening the fiscal capacity of local bodies, in line with constitutional intent, can also help improve expenditure efficiency and investment outcomes at the grassroots level," it added.