Cash transfers expand fast, yet remain point-fixes without building institutional strength.
India’s weak state capacity limits delivery of education, healthcare and justice services.
Long-term welfare transformation demands political will, fiscal decentralisation and effective governance.
A few days back Haryana became the 15th state to initiate a cash assistance scheme for women. As Bihar prepares for elections with similar promises on the table, a silent transformation is reshaping India’s welfare system. The favourable confluence of state-election politics, Jandhan-Aadhaar-Mobile enabled Direct Benefit Transfer infrastructure and empirical evidence has surged the appeal of cash transfers.
18 states have implemented over 70 government-backed transfer schemes: a three-fold increase in five years. Their budgetary appropriations, accounting for 11% of total welfare spending, are larger than even India’s flagship workfare scheme. Recently, an experimental study highlighted the Jharkhand government’s transfer efficacy in improving nutritional outcomes for children and mothers. While encouraging, the takeaways have to be read carefully and qualified in context.
Cash transfers are effective brute-force solutions but remain point-fixes for poverty alleviation. Their underlying assumption about the cause of poverty is simply the lack of sufficient initial income. Yet poverty is notoriously complex, with multiple mutating constraints inducing it.
Any policy instrument may be necessary but will not be sufficient except in combination with other instruments. Access to quality public institutions and services through a well-functioning state delivering education, healthcare and workfare to improve human capital remains equally essential.
Besides, due to limited resources states must both target their transfers and either shift expenditures from elsewhere or increase fiscal deficits. 12 of the 15 states that recently implemented transfer schemes for women financed them by cutting revenue expenditures elsewhere. In low-capacity contexts, restructuring some of the exchequer toward transfers is welcome. Transfers are administratively simple.
They bypass leakage, corruption and market distortions inherent in subsidies. But leaning on them cannot come at the cost of neglecting the state’s broader welfare portfolio. Before states jump onto this bandwagon policymakers must recognise that transfers are not silver bullets. They impose trade-offs: large lump sums to few or smaller streams to more people.
The benefits do not persist and have been observed to fizzle out. Moreover, fiscal capacity to accommodate transfers is limited. Therefore, they have to be targeted. This entails testing beneficiary eligibility on some income-poverty line. Yet when poverty lines range from $1.48 (DR Congo) to $44.02 (United States), with India’s at $2.81, it is clear they have little intrinsic significance. The motivation for sketching a poverty line is only to triage the state’s development efforts.
State Capacity Gap
Deprivation exists in a continuum and even the near-poor is as vulnerable. Whether one falls a whisker below or inches above a poverty line, it should not make a difference—the development model should work better for them either way.
One can lie anywhere on the income distribution yet experience poverty due to ineffective governance or weak institutions. This exposes the limitation of income-based solutions. Transfers may prop up consumption for a while but cannot sustainably address development woes or poverty, especially those rooted in institutional failures—the inability of schools to educate, courts to enforce contracts or clinics to heal. What then should be prioritised? The answer lies in addressing a more structural challenge—building an effective state.
With 16 public employees per 1,000 people (Brazil has 111), 1 policeman per 709 (global average: 450) and just 15 judges per million (the Law Commission once recommended 50 per million), India’s personnel capacity is a fraction of comparable countries.
Relative to its responsibilities, the frontline remains sparse in count, expertise and resources. A state operating with such bureaucratic overload imposes regressive burdens, disproportionately felt by those who depend on it or cannot afford to exit to private alternatives. While many may not care about public service delivery in their curtained existence, the democratic cost exacts itself—eroding the interface through which millions of citizens experience their state.
Maternal transfers have moved the needle for immediate neonatal care. But what of the child’s next years? Over 8.9 crore children under six are enrolled in government-run child development centres.
Consider the state of its workers, stretched thin across multiple responsibilities: nutrition, health monitoring, preschool education and home visits. A single worker handles it all. Placing an additional worker in an Anganwadi significantly improves children’s learning and health outcomes. The benefits, measured by expected increases in future wages through better learning, far outweigh hiring costs.
Justice Through Capacity
Similarly, one-third of High Court judge positions and a quarter of support staff posts remain vacant. The result: languishing case backlogs and slower justice delivery. It has been empirically shown that adding just one district judge increases the backlog resolution rate by 10%.
The efficiency gains do not just manifest in better citizen experience, they spill over. Judicial capacity frees up valuable assets, which are otherwise hamstrung in lingering litigations. Economic returns from improved contract enforcement and institutional trust materialise within just two years of enhanced staffing.
Augmenting personnel capacity represents merely the lowest-hanging fruit. To prevent efficiency reforms from becoming circular problems in low state-capacity contexts, sequencing capacity creation through technology beforehand is helpful.
For instance, where Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) workers’ wages were routinely delayed, digitised payment tracking—tested in Madhya Pradesh and Jharkhand—improved processing times by enhancing bureaucrats’ access to information.
The examples illustrate only a sliver of the broader capacity challenge. The next frontier to improve state capacity needs to be concerted with political will to streamline governance processes and improve productivity.
This is not a pipedream. Adequate fiscal decentralisation to local governments, providing more agency across administrative cascades and reviewing redundant regulation represent concrete steps forward.
In our political economy however, this state-building agenda competes with the allure of transfers. Welfare policies need to be guardrailed against its tempting politics to prevent a race.
Even the design of income transfers—their size, frequency and conditionalities—requires rigorous institutional evaluation to ensure their optimal cost-effective impact.
Currently, even basic transparency is missing. Of 70 schemes, comprehensive fiscal data is available for only 41, according to DEEP, a nationwide budget transparency analysis platform.
Leaders must resist announcements that sweep aside concerns over fiscal trade-offs or the need to address other dimensions of welfare. This entails less glamorous work of state-building but will be necessary for policies to be truly transformative rather than transactional.
Govind Gupta is a predoctoral fellow in economics at Kellogg School of Management and a former governance-consultant. Views expressed belong solely to the author.
