India’s welfare landscape is caught in a paradox: States are aggressively expanding welfare schemes to gain political favour, often at the expense of fiscal prudence. Three patterns now define state-level welfare politics. First, state governments routinely announce new welfare schemes or enhance existing benefits, especially around election cycles, to broaden electoral appeal. Second, fiscal stress manifests in delayed payments to contractors, vendors, hospitals and beneficiaries. Thus, developments that often appear isolated reflects deeper structural strain. Third, state debt continues to rise, with widening fiscal deficits and deteriorating debt-to-GSDP ratios. Taken together, these trends offer a more accurate picture of states finances than routine political messaging. Notably, few state governments communicate these to citizens, as they offer little immediate electoral reward.
Across states, the pattern is largely the same: Delayed welfare-related reimbursements to stakeholders, mounting arrears or inability to meet salary obligations, even as welfare promises continue to expand and pensions or subsidies remain unpaid. Telangana, Andhra Pradesh, Karnataka, Himachal Pradesh and Punjab each reflect different facets of this fiscal strain.
These cases show how welfare expansion often results in arrears rather than sustained support, with limited attention to legacy debt or repayment plans. The burden is pushed onto future governments, at times forcing asset sales at discounted valuations. Viewed against per-capita income, the scale of indebtedness is stark: Punjab and Himachal Pradesh shoulder the burden of a debt-to-GSDP ratio of 45-47 per cent. Fiscally disciplined states such as Odisha and Gujarat are in a much better position.
A new layer has, however, recently entered this ecosystem: Consultancies advising state governments on “fiscal prudence” and “welfare optimisation”. These strategies claim to balance compassion with caution but often devolve into fiscal optics, selectively trimming or re-prioritising beneficiaries to project efficiency. Such moves may please political actors and consulting firms, but they risk diluting citizen-centricity, the core of public policy. It resembles paying the bill on an old credit card by opening a new one: The debt cycle persists, but the narrative changes.
In 2023, India’s combined government debt — Centre plus states — stood at around 81 per cent of GDP. States alone carry debt worth roughly 28 –30 per cent of their combined GSDP, excluding government-guaranteed loans and off-budget borrowings by state agencies and special purpose vehicles. States that aggressively expand welfare entitlements, particularly large health insurance schemes, tend to accumulate higher debt-to-GSDP ratios, a clear red flag. While the Centre carries a substantial portion of sovereign debt, the fiscal position of states increasingly shapes India’s overall financial credibility.
When states finance welfare programmes through State Development Loans (SDLs), they add to the supply of government bonds in the market. Higher supply pushes up yields, raising borrowing costs for states themselves. The effect does not remain confined to them: As investors demand higher returns on government debt more broadly, borrowing costs can rise even for the Centre, squeezing fiscal room for development spending. Persistent arrears, whether to contractors, hospitals or welfare beneficiaries, further signal distress. Credit-rating agencies, multilateral lenders and global investors assess India’s public debt as an integrated sovereign balance sheet, not as isolated state accounts. If governments continue adding liabilities through ambitious but underfunded schemes despite inherited backlogs, welfare beneficiaries eventually suffer service disruption and both state and national risk profiles deteriorate. Conversely, abruptly curbing ongoing welfare schemes to manage debt or finance new promises can trigger long-term social and economic instability.
This is why welfare must be viewed not merely as a budgetary matter but as a question of national economic stability. Lessons from education policy are instructive. Education, like many welfare subjects, is on the concurrent list. Fragmentation once threatened equity and access, prompting interventions such as the Right to Education Act and later the National Education Policy 2020. These created a coherent framework of guiding principles without undermining state autonomy, ensuring a national baseline while preserving innovation.
Come election season, such announcements are not just expected but eagerly anticipated. The trend of populist welfare is global and India is no exception. Though these political philanthropies provide short-term income support, they also raise a fundamental question: Should India remain trapped in fragmented, populist welfare politics, or is it time to build a unified, rights-based and economically sustainable social security system that fuels the economy? Can the “Digital India” ecosystem be leveraged to deliver smart social security governance that empowers and uplifts? The answer is important for the future of over half of India’s population, who are under the age of 28 and aspire to live a developed-nation dream and the elderly who will need support by 2047.
The pressing challenge is optimising scattered schemes. This includes eliminating duplications, identifying the right beneficiaries and investing in capacity building and market-ready skill sets for our working population to grow the pie, rather than compete over its pieces. A related challenge is the need to reimagine direct transfers not as isolated, consumptive payouts, but as self-multiplying instruments, where one entitlement has the potential to unlock access to others. For example, could pension benefits be extended to include education allowances for grandchildren of the elderly?
The G20 New Delhi Declaration calls for “sustainably financed universal social protection coverage”. “One Nation, One Social Security governance” presents a promising path forward. It can address current inefficiencies to make the best of the scarce fiscal resources, while sparing citizens the pain of running between various units of the government. For instance, E-Shram registrations are meant for unorganised workers and EPFO registrations largely cover formal employment. They compete with each other and create problematic boundaries when there is an overlap. Specified eligibility conditions and lack of interoperability often deny simple benefits envisaged by the legislators. A closer look at many state government schemes shows they often repackage existing benefits under new names, offering little differentiated value.
A “one government” approach moves away from silos, shifting the focus to collective outcomes. It is time to put the Digital India Stack, Aspirational Districts Programme to best use and build on the experiences from programmes like PM-Gati Shakti. Central legislation like the Employees’ Provident Funds & Miscellaneous Provisions Act, Employees’ Compensation Act, ESIC Act, BOCW and Maternity Benefit Act provides security to working segments across federal boundaries. Our Constitution empowers states to frame similar schemes in their own spheres. The EPFO currently maintains around 30 crore accounts, with some 8 crore actively contributing. The Cabinet, on July 1, approved the rollout of the Employment Linked Incentive Scheme to enhance job creation, employability and social security, targeting about 3.5 crore jobs in two years. It has chosen EPFO as the vehicle, trusting its capacity at scale. Last financial year, EPFO settled more than 5 crore claims. ESIC is another pillar that delivers at scale. These institutions can be strengthened to transition to a “one government” welfare system, where states are partners in adding value as a top-up rather than reinventing the wheel.
As a caution, any move towards a unified social security governance model must be federated, flexible and incentive-driven, with the autonomy to factor in unique social realities. Through bold political consensus, this transition can become one of India’s most transformative governance reforms since Independence.
What India needs, therefore, is a National Welfare Policy grounded in shared principles of fiscal discipline, transparency and continuity. Such a framework should illuminate not only how many schemes a government launches or inherits, but also the additional debt they generate, whether that debt could have been avoided and the long-term implications it carries. It must ensure that existing welfare schemes and citizens’ entitlements are not disrupted to manage debt or finance new promises simply because elections loom. The choice before India is clear: Continue with fragmented welfare expansion that erodes fiscal health or adopt a national framework that balances compassion with prudence, ensuring equity, stability and sustainability.
