Politically Timed Cash Transfers Worth ₹2.5 Lakh Crore Reflect Economic Failure, Says Bernstein In Letter To PM Modi

(MENAFN- Live Mint) In a 12-page open letter to Prime Minister Narendra Modi, global equity research and brokerage firm Bernstein has cautioned that India's dependence on welfare schemes is doing more harm to the economy than good.

“A rupee locked into broad, politically timed cash schemes is a rupee not building roads, logistics, irrigation, power distribution, public transport, schools or hospitals-areas where the multipliers are higher, and the productivity gains are more durable,” the firm observed in the letter.

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It asserted that subsidies, where a small productive group of taxpayers is used to provide cash to the broader population, particularly to win votes, either reflects“the ills of democracy” or the“economic failure of the nation.”

The firm attributed the increase in cash-transfer schemes to the inability to provide jobs and social security. It added that state-led cash transfer schemes have scaled so quickly that they are now reshaping fiscal priorities, not necessarily in ways that boost growth.

Cash Transfers

The firm noted that more than half of the number of Indian states have announced unconditional cash transfer to women–often in the run up to elections–with total annual outlays of about ₹1.7-2.5 lakh crore or approximately 0.5% of India's GDP.

In Madhya Pradesh, the Ladli Behna scheme promises ₹1,500 a month to around 13 million women. Over a full term, this adds up to 700 billion rupees. Maharashtra's Ladki Bahin scheme, launched later but covering roughly 25 million women at similar payouts, is of comparable scale.

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In Bihar, the incumbent JD(U)-BJP government announced a cash transfer of ₹10,000 to the state's women weeks ahead of the Assembly elections in the politically significant state last year. Pre-election transfers alone were estimated at about ₹125 billion in just a few weeks.

“Put together, just these cash schemes across states are now in the same fiscal ballpark as some of India's largest social-sector programmes. That is money which could otherwise be compounding in hard infrastructure, urban capacity, human capital or Research & Development,” the brokerage firm highlighted in its candid letter.

Not 'Freebies'

The firm clarified, however, that this was not an argument to scrap welfare schemes altogether. In fact, there is sufficient evidence that well-designed cash transfers can lower vulnerability, smooth consumption, and boost local demand in the short term.

But when these schemes start to absorb 2-3% of GSDP in some states, they inevitably squeeze capex, narrow fiscal space, and add to inflation risk if supply does not keep up. And for an investment-starved emerging economy like India, they are a very expensive way to buy growth.

That said, targeted, time-bound support will always be needed to address pockets of distress or to absorb major global shocks.

“The concern is about making large, unconditional, election-synchronised transfers a permanent feature of state budgets. If that happens, we risk locking into a low-productivity equilibrium where a rising share of tax funds is consumed today rather than capabilities for tomorrow,” the firm noted in the letter.

If this goes unchecked, India's per capita income growth will be stunted, even if the headline GDP growth looks respectable.

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