States must back human capital over cash: Economic Survey

Unconditional cash transfers (UCTs) by state governments are increasingly straining finances, crowding out investment and posing risks to medium-term growth, warned the Economic Survey.

Set to reach ₹1.7 lakh crore by the end of this financial year, these transfers, though politically popular, come at a high price as fiscal indiscipline of states could raise sovereign borrowing costs. "States' fiscal priorities, perhaps, are casting a shadow on the sovereign's borrowing cost, as investors focus on the fiscal parameters of the general government rather than just those of the Union government," the survey said. It urged states to prioritise capital formation and human-capital investment over open-ended cash support. The survey, ahead of the sixteenth finance commission recommendations, also argued that while transfers from the Centre expand the fiscal space available to the states, the latter's contribution of growth depends on the prevailing fiscal condition of state finances and, more importantly, on how these resources are deployed. The number of states implementing UCT schemes has increased fivefold since 2022-23, with nearly half now running revenue deficits. The survey highlighted intensifying fiscal pressure, with combined gross fiscal deficit of states increasing to 3.2% of gross domestic product (GDP) in 2024-25 from 2.6% in 2021-22, revenue deficits widened to 0.7% of GDP from 0.1% in 2018-19, and liabilities climbed to 28.1% of GDP, approaching the highs seen during the Covid-19 pandemic.

The survey warned that this may amplify pressure on already stretched public finances, with committed spending on salaries, pensions, interest and subsidies consuming 62% of revenue receipts in 2023-24. In the first eight months of the current fiscal, state revenue growth slowed to 6.6%.

Outlays for these schemes range from 0.68% to 8.26% of total expenditure, often without sunset clauses or periodic review, creating long-term capital blockages and leaving limited room for growth-enhancing investments. "(This) raises concerns about fiscal sustainability and medium-term growth, particularly when not complemented by investments in employment, skills, and human capital," chief economic advisor V Anantha Nageswaran said in the survey, citing data from 34 low- and middle-income countries, which suggest that while UCTs boost immediate consumption, they do not consistently improve nutrition or education outcomes, or enable long-term exits from poverty.