Cash transfers create jobbers, not jobs

Cash transfers can insure households, but without structural reform they entrench dependency and fiscal stress

India’s growth in cash transfer reflects both political economy realities and developmental constraints. The question is not whether transfers should continue, but how. If they support households while aiding structural transformation, they can strengthen inclusive growth. If they merely entrench dependency, they risk fiscal stress and reduced dynamism.

The fate of India’s welfare state will be measured not by the scale of transfers, but by their alignment with a viable growth trajectory. India is making structural adjustments to its welfare architecture. Unconditional cash transfers — especially to women and vulnerable households — have shifted from fringe strategies to central instruments of policy. The scale alone is staggering. By 2025–2026, States are anticipated to expend nearly Rs 1.7 lakh-crore on unconditional cash transfers to women annually (roughly 0.5% of GDP) — currently operating in over a dozen States and has over 100 million beneficiaries. Nationally, the Direct Benefit Transfer (DBT) architecture, to which more than 1,200 schemes attest, has greatly enhanced efficiency, decreased leakages, and secured last-mile delivery.

From a design perspective, it’s a great success in governance. There is also a clear logic on welfare with empirical evidence that cash transfers drive household consumption, reduce vulnerability, and provide women with financial agency. Funds are usually spent on food, educating, and healthcare, with little evidence of negative labour-supply implications. Non-cash transfers, even free bus travel for women, are now generating tangible income savings and enhanced mobility. In a similar vein, conditional transfers — like West Bengal’s Kanyashree initiative — have been shown to reduce child marriage by 6.7%, and increase secondary education attainment by 6%. But the macroeconomic effects are murkier.

India’s expanding cash-transfer regime is not merely a question of welfare intent but of fiscal design. The critical issue is whether States possess the revenue strength to sustain such commitments without compromising long-term investment. A comparison across major States reveals a clear divergence between welfare ambition and fiscal capacity.

The contrast is instructive. West Bengal allocates over 12% of its total expenditure to a single cash-transfer scheme, while generating a relatively modest share of its Budget through its own revenues. Coupled with a higher revenue deficit, this indicates a structurally tighter fiscal position, where welfare expansion risks crowding out capital expenditure. In contrast, Maharashtra and Odisha combine lower welfare burdens with stronger internal revenue generation and lower deficits, preserving greater fiscal space for infrastructure and growth-oriented spending. Karnataka and Madhya Pradesh occupy an intermediate position, where welfare commitments are significant but partially offset by stronger revenue bases. The pattern suggests that the sustainability of cash transfers is not uniform across States; it is contingent on underlying fiscal capacity.

The picture is further complicated by employment. India’s labour market, especially for skilled youth, remains structurally weak. High unemployment reflects a mismatch between education and labour-market needs, compounded by limited growth in labour-intensive sectors. In this context, income transfers — such as youth stipends in West Bengal and Madhya Pradesh — are reactive, not structural. They deal with symptoms, not causes. This distinction matters.

Cash transfers are consumption-driven: they can spur local demand and cushion the economy, but their multiplier effects remain limited unless tied to productive activity. By contrast, investment in manufacturing clusters, logistics, urban infrastructure, and human capital generates lasting gains in jobs and output. The risk is that States will rely on visible political transfers while underinvesting in less visible but essential sectors for economic development.

Labelling these schemes ‘freebies’ oversimplifies their role. In a country marked by informality and income volatility, they function as social insurance. Transfers stabilise households, raise welfare, and under the right circumstances can even boost labour-market participation. The challenge lies in design and balance. Transfers work best when they complement rather than replace growth strategies. Time-bound support could be linked to skills training, apprenticeships, or job placement. Wage subsidies for first-time jobbers in MSMEs could reduce hiring risk and expand formal employment. Sector-specific industrial policies — textiles, food processing, electronics, and services — could drive labour-intensive growth.

Parallel investments in urban infrastructure and the care economy would absorb surplus labour while meeting social needs. Ultimately, the equilibrium between welfare and economic development is not automatic, but contingent upon policy choices.

Debdulal Thakur is Professor, Vinayaka Mission’s School of Economics and Public Policy, Chennai. Shrabani Mukherjee is Independent Researcher, Economics and Public Policy, Chennai.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)