High social welfare spend by major states limit capital outlays: Crisil

New Delhi: Gross spending on social welfare schemes by the top 18 states, including Karnataka, Tamil Nadu and Kerala, is estimated to rise to Rs 6.4 lakh crore or around 2% of their aggregate gross state domestic product (GSDP) in the current financial year led by higher expenditure on pension, medical assistance and direct benefit transfers (DBT) to women primarily as election commitments, Crisil Ratings said on Thursday.

States have boosted their expenditure on social welfare schemes in the past two years. Between 2018-19 and 2023-24, expenditure on social welfare by major states was in the range of 1.4-1.6% of GSDP. This increased to 2% in 2024-25 and is estimated to remain at around 1.9% in the current financial year.

“Social welfare expenditure in fiscal 2025 and 2026 is estimated to increase by Rs 2.3 lakh crore from fiscal 2024 level. Of this, Rs 1 lakh crore is towards direct benefit transfers (DBT) to women primarily as election commitments,” said Anuj Sethi, Senior Director, Crisil Ratings.

The remaining Rs 1.3 lakh crore increase is primarily for financial/ medical assistance to backward classes and social security pension to select focus groups, he said.

The rating agency warned that the elevated spending on social welfare would result in high revenue deficit, thereby limiting the flexibility of the states to undertake higher capital outlays.

The 18 states, which have been considered for the analysis, account for 90% of aggregate gross state domestic product (GSDP) of all Indian states. The analysed states include Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh, Kerala, Odisha, Jharkhand, Haryana, Punjab, Bihar, Chhattisgarh and Goa.

“Although allocating funds to social welfare schemes is crucial for socio-economic development, an increase in such allocations without a corresponding increase in revenue receipts can impact the credit profiles of the states in the long run, underscoring the importance of maintaining fiscal prudence,” the rating agency said.

Revenue expenditure on social welfare encompasses developmental expenses essential for the welfare of backward classes, women, children and labour, as well as assistance to certain demographics in the form of social security pension.

The increase in social welfare expenses over fiscals 2025 and 2026 is not estimated to be uniform across the states with 50% of analysed states expected to see a significant surge in these expenses while remaining are expected to see these expenses at relatively stable levels or see a modest increase.

The overall revenue expenditure of the analysed states is estimated to increase at a compound annual growth rate of 13-14% between fiscals 2025 and 2026, while revenue receipts grew at a slower pace of 6.6% in 2024-25 and are expected to increase by 6-8% in 2025-26.

“Rise in revenue deficit normally results in state governments reducing capital outlay to maintain their fiscal stability,” said Aditya Jhaver, Director, Crisil Ratings.  

States’ capital outlay growth declined to 6% in 2024-25 from an average of 11% recorded in the previous five years.

“If this trend continues this fiscal, it could constrain states’ capital outlay, which has a higher multiplier effect and can stimulate increased investment in the economy,” Jhaver said.