Rajani Sinha warns that the freebie culture is pushing states towards budget problems

Economists are raising alarms about the rising budget burden caused by cash handouts and subsidies – benefits that many fear are becoming increasingly unsustainable.The issue featured prominently in a recent ET Now discussion, which started with a pointed question about the long-term viability of these schemes. ET Now asked, “That’s essentially the question we’re asking when states are handing out these freebies that are creating a budget deficit for those states and these are obviously financially not viable schemes. So how are they actually benefiting voters or are they benefitting voters at all in the longer term?”

States under increasing pressure
Economist Rajani Sinha noted that the use of freebies is not new – neither in India nor elsewhere – but the current fiscal environment makes their impact much more worrying. State budgets, she stressed, are already under pressure. Sinha said: “When I look at the fiscal implications of this, it is indeed worrying because it is happening at a time when public finances are not in a very good state anyway.”

Her estimate shows that the combined state budget deficit in the years 25 and 26 amounts to 3.2% of GDP, thus exceeding the 3% limit. A survey of ten states – including West Bengal, Bihar, Jharkhand, Odisha and Tamil Nadu – revealed freebies worth ₹1.5 trillion in recent years, accounting for almost 7% of their revenue.

Bihar’s fiscal deficit has reached 5.7%, while Punjab, Rajasthan, Madhya Pradesh and Andhra Pradesh have deficits of more than 4% of GDP. Debt levels are even more worrying: Punjab is close to 40% of gross national income, while several states hover around 30%.

Energy sector hit hard
The fiscal pressure also extends to state-owned enterprises. ET Now highlighted, “State-owned enterprises lost Rs 68,832 crore in 2022-23 alone due to free energy schemes.”Yet election manifestos continue to add more freebies instead of addressing the challenges through tariff reforms or improved financial management.

Sinha pointed out that interest payments alone eat up 20 to 25% of revenues in states like Punjab and Bihar, leaving minimal room for development expenditure.

Capex offers some relief
Despite the stress, Sinha noted that states have increased their capital expenditure in recent years. Between FY21 and FY24, capital expenditure increased from 2.1% to around 2.4% of GSP. Bihar in particular has shown strong GDP growth of 8 to 12% and a remarkable increase in the number of completed investment projects – from 1.8% to 5.8% in five years.

She said the trend reflects active infrastructure development, supported by both governments and private investments.

Debt is piling up at an alarming rate
Yet the broader debt picture remains bleak. ET Now noted, “Between 2013-14 and 2022-23, the combined national debt has tripled from Rs 17.5 lakh crore to Rs 59.6 lakh crore.”

Nineteen states now exceed the 30% GSP debt limit. The Supreme Court and the RBI have also issued warnings, describing the freebie-driven model as “unsustainable” and warning against creating a dependent population.

Sinha reiterated his concerns: “The national debt has risen to about 29% of the GSDP, which is worrying and as I said, about 20% of their income goes to interest payments.”

When is a state in danger of going bankrupt?
The discussion became sharper when ET Now pointed out that Punjab spends ₹6,700 crore annually on energy subsidies, while free agricultural energy adds another ₹14,337 crore. Rajasthan, Andhra Pradesh and West Bengal also spend more than 20% of their revenue on subsidies.

Sinha acknowledged the deepening crisis. “For some of these states, as you mentioned… public finances are in a very difficult shape,” she said, warning that with debt levels at 40% of GSDP in states like Punjab, “we don’t know where the end will be.”

She warned that competition between states could intensify, further exacerbating budget pressures.

A problem without a clear exit
Despite repeated warnings from economists, courts and regulators, the political appetite for freebies shows little sign of slowing. And unless corrective action is taken, experts fear that rising debt and falling development spending will ultimately burden the very voters who want to appease these schemes.

Without collective political restraint, Indian states risk sliding even deeper into a debt trap – a trap that could take years, if not decades, to resolve.