How State Populism and Fiscal Spending Are Slowing India’s Growth

Union Finance Minister Nirmala Sitharaman last week cautioned that many Indian states are “in difficulty” owing to “freebies.” She emphasised that there is a thin line between investing money in productive assets and giving freebies and posed questions about the states’ financial discipline. She also said there is no way to “rationalise” committed expenditure of states, especially if they are beyond affordable limits.

“There are states which have, and I am afraid to say this, 70 per cent of their revenues going for committed expenditure. When I say committed, it’s salaries and pensions—they have to give it. I am not saying don’t give. But 70 per cent? With 30 per cent, what else will you do?” Sitharaman said at an event last week when asked about the need to strike a balance between investments in productive assets and the increasingly growing number of populist schemes like “freebies.”

Sitharaman stated that there are several issues with the fiscal prudence of the states, and freebies are one of them, along with committed expenditure. She highlighted how it is the job of the finance minister to generate revenue; a state budget or national budget cannot be about having given away revenue. “It is then that borrowing is resorted to, when revenue doesn’t increase much and the levels of committed expenditure and freebies are high,” she said. She highlighted that from next year onwards, the central government’s focus will be on the debt-to-GDP ratio and that both the Centre and the states have to adhere to it. For the financial year ending 2026 (April–March), the Centre has set a fiscal deficit target of 4.4% of GDP. The government has been steadfastly working towards reducing its debt-to-GDP ratio, especially after economic conditions worsened post the pandemic era.

NK Singh Committee Report and Debt-to-GDP Ratio

The NK Singh Committee was formed in 2016 and was chaired by NK Singh, former revenue and expenditure secretary, to review the Fiscal Responsibility and Budget Management Act (FRBM). The panel included former Reserve Bank of India Governor Urjit Patel and former finance secretary Arvind Subramanian. Submitted in 2017, the report prepared a draft Debt Management and Fiscal Responsibility Bill to replace the Fiscal Responsibility and Budget Management Act of 2003.

The FRBM Act was aimed at enhancing public fund management and lowering the fiscal deficit rate in India. The core objective of the Act was to eliminate the revenue deficit and bring the fiscal deficit down. The NK Singh Committee suggested using debt as the primary target for fiscal policy and recommended a debt-to-GDP ratio of 60%, with a 40% limit for the Centre and a 20% limit for the states, aiming to achieve this target by 2023. However, almost three years later, India’s debt-to-GDP ratio stands at 82.6%—far from its target goal.

Populist Playbook – A Bihar Blueprint

Reports and experts suggest that the recent surge in populist schemes ahead of elections by many states is a fiscal mimicry from Maharashtra’s policies. Maharashtra, being the richest Indian state by GDP, can generate revenue to match its welfare schemes and expenses. However, the model falters when less-developed states like Bihar or Telangana adopt this approach without corresponding fiscal and structural reforms.

The Mahagathbandhan in Bihar released its manifesto titled “Tejashwi Pran,” which showcased a series of populist schemes, including “one government job per family”, monthly allowance of ₹2,500 for women, and 200 units of free electricity for every household. While it is the duty of the government to ensure social welfare, it is also the responsibility of the same government to ensure fiscal discipline.

When promises such as “one government job per family” are made, it is crucial to understand labour force participation and public sector capacity. Bihar needs to create employment for its 3.16 crore people who have registered on the government’s e-Shram portal, according to media reports. However, how can the government create jobs in the public sector, where recruitment is conducted through state public commissions? What are the stakes here—meritocracy, educational qualifications, economic background, or social mobility? There is no clear answer for this yet.

The Maharashtra Model

Maharashtra’s Finance Minister Ajit Pawar presented a behemoth budget of ₹6,12,293 crore, which included strong promises of three free LPG cylinders a year for BPL families, free electricity for the state’s farmers, and the much-debated ₹1,500 a month for women under the CM Ladki Bahin Yojana. What are the costs of these promises? A sweeping annual price tag of ₹46,000 crore; far removed from the Centre’s move toward fiscal prudence.

The Congress-led alliance has upped the stakes to ₹3,000 for women under the proposed Mahalaxmi Yojana, along with more “freebies” for voters. Maharashtra’s political battleground has turned into a massive competitive arena of populism, compromising elements of democracy and socialism. Economic development and social mobility have time and again seemed to have voted for welfare schemes. However, these promises resurface in the next election as the never ending cycle of instability, limited mobility of the masses, and unfulfilled promises by the leaders they choose continue to prevail.

Can India’s Populism Sustain?

According to Paras Rajai, Analyst at India Ratings, the issue is not with higher spending but with its composition. “If 70–80% of a state’s revenue comes from the Centre, the key question is where that money goes. Productive spending builds growth, but welfare-heavy budgets deepen fiscal gaps.”

A recent report by the Comptroller and Auditor General (CAG) of India highlights this growing imbalance. The widening gap between states’ revenue receipts and expenditures indicates rising fiscal stress. In FY 2022–23, 11 states, including Bihar and West Bengal, borrowed more than they invested, with their capital expenditure falling below their net public debt receipts. This suggests that many states are now borrowing to fund revenue expenditure - such as salaries, pensions, and welfare schemes; instead of creating productive assets that could drive long-term growth.

The Generational Cost

Every rupee borrowed for consumption rather than creation shifts the burden onto the next generation, one that will inherit welfare promises without the capacity to pay for them. The vicious cycle of unkept assurances and the constant hope of a “saviour” government traps citizens, especially in less-developed states, within a mirage of social mobility and economic accessibility.