Relevance: GS III (Economy – Government Budgeting) | Source: Indian Express; Economic Survey 2025-26
1. The Context: Good Politics, Bad Economics?
The Economic Survey 2025-26 has flagged a worrying trend in Indian states. Governments are increasingly prioritizing Unconditional Cash Transfers (UCTs)—direct cash handouts without specific requirements—over long-term development.
- The Surge: The number of states implementing such schemes has increased fivefold. In FY26 alone, states are expected to spend nearly ₹1.7 lakh crore on these transfers.
- The Impact: While this puts money in pockets immediately, it is hurting the states’ financial health. In 2019, 19 states had a revenue surplus (earned more than they spent on daily needs). By 2025, only 11 states remained in surplus.
2. The Risk: “Crowding Out” Growth
The core economic warning is about the “Quality of Expenditure.”
- Consumption vs. Creation: Money spent on cash transfers is Revenue Expenditure (consumption). It is gone once used. Money spent on roads or factories is Capital Expenditure (asset creation).
- Crowding Out: When states spend too much on committed cash transfers, they have little money left to build infrastructure. The Survey warns that this “fiscal indiscipline” casts a shadow on the entire country, potentially raising interest rates for everyone (Sovereign Borrowing Costs).
UPSC Value Box
| Concept / Term | Relevance for Prelims |
| Crowding Out Effect | In this context, it refers to high government spending on welfare/consumption leaving fewer resources available for investment in infrastructure (Capital Expenditure). |
| Revenue Deficit | A situation where the government’s daily earnings (taxes) are less than its daily expenses (salaries, subsidies). It indicates the government is borrowing just to survive, not to grow. |
| Consolidated Fiscal Deficit | The total borrowing requirement of the Union Government + State Governments. Credit rating agencies look at this combined number, not just the Centre’s deficit. |
Q. With reference to Government Budgeting in India, consider the following statements:
- Expenditure on Unconditional Cash Transfers (UCTs) is classified as Capital Expenditure because it increases the purchasing power of the people.
- A high Revenue Deficit implies that the government is borrowing money to finance its day-to-day consumption needs.
- The Economic Survey 2025-26 observes a decline in the number of states with a revenue surplus compared to FY19.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer: (b)
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