Economic Survey 2025–26: Are Freebies Helping India or Hurting Its Economy?

KAKALI DAS

The Economic Survey 2025-26 has recently brought the issue of freebies back into serious public discussion. For a long time, freebies were mostly spoken about as a political issue, wrapped in election promises and party debates.

This time, however, the Survey has placed the issue firmly in the economic domain. It asks a direct and uncomfortable question. Are freebies really helping people in a sustainable way, or are they slowly weakening the foundations of our economy?

Economic Survey 2025–26: Are Freebies Helping India or Hurting Its Economy?

The Survey makes it clear that while welfare policies are essential to protect vulnerable sections of society, relief cannot become routine and permanent without clear goals and outcomes. When support turns into habit, it begins to strain public finances and distort growth priorities. This is exactly the concern highlighted by the Finance Minister while presenting the Economic Survey.

The Survey explains that freebies in state finances are no longer a marginal issue. They are not just a matter of political debate anymore. They have started to hurt the fiscal health and long term growth story of the country. In recent years, unconditional cash transfers and free benefits announced by states have increased sharply. These transfers are given without linking them to education, health, employment, skills, or productivity. As a result, they place a continuous burden on state budgets while offering only short term relief to beneficiaries.

One of the most striking observations in the Survey is the rapid rise in the number and size of freebies. If we compare financial year 2023 with financial year 2026, the value of freebies has increased nearly five times. This is a massive jump in a very short period. The data presented shows that at least eleven states have announced or expanded unconditional cash transfer schemes between 2024 and mid 2025. Many of these schemes are women centric and are promoted under different names, but their structure remains largely the same. Money is transferred regularly without any condition or time limit.

The Survey points out that in the coming financial year, expenditure on such schemes is expected to touch around one point seven lakh crore rupees. This is a significant amount, especially at a time when both the central government and state governments are trying to reduce fiscal deficits. The Survey warns that this growing expenditure will increase fiscal stress, reduce capital spending, and weaken growth prospects. Capital spending is essential for building roads, schools, hospitals, infrastructure, and productive assets. When money is diverted towards routine cash transfers, there is less left for development.

Another concern raised is related to labour incentives. When people receive income without any link to work or skill development, the motivation to participate in the labour force can weaken. The Survey highlights that this trend can reduce labour force participation, especially among women, if transfers replace the need or incentive to seek employment. Welfare is meant to support people, not discourage them from improving their economic position.

To understand why this issue is serious, it is important to first understand what freebies actually mean. When the government gives money or goods without any conditions attached, it is called an unconditional cash transfer or free benefit. This support is not linked to employment, education, health, skill training, or income level improvement. In most Indian states, these schemes do not have a sunset clause. This means there is no clear end date or exit strategy. Once introduced, the scheme continues indefinitely.

The absence of a sunset clause creates a major problem. Politically, it becomes extremely difficult for any government to withdraw such schemes, even if finances worsen. We have seen this across many states. Once one government introduces freebies, the next government often promises the same or even more benefits instead of correcting or redesigning the scheme. Delhi is a good example. When the AAP government introduced free electricity, water, and other benefits, these schemes became politically untouchable. Even when new governments came in or when financial stress increased, the promises only expanded further. This shows how freebies can permanently lock states into high expenditure paths.

Another important trend highlighted is that freebies are no longer limited to a few regions. Earlier, such schemes were concentrated in certain states. Now they have spread across the country. States like Andhra Pradesh, West Bengal, Haryana, and many others have adopted similar approaches. This is why the Survey clearly states that the problem is not welfare itself. The problem lies in the design of welfare. What is the goal of the scheme. How is it implemented. What outcomes are expected. Without clarity on these questions, welfare spending becomes inefficient and risky.

The next question the Survey explores is why freebies have increased so rapidly in recent years. The first reason lies in India’s political economy. Voters increasingly expect immediate and visible benefits from governments. If a political party promises monthly cash transfers or free services, people expect these benefits to be delivered quickly once the party comes to power. Cash transfers provide instant visibility. Unlike employment generation or infrastructure development, which takes time, money transfers can be delivered within weeks.

There is also a strong electoral incentive involved. Many elections in recent years have shown that promises of direct benefits can influence voting behaviour. Political parties know that rolling back freebies carries a high political cost. If a government withdraws a benefit, public sentiment often turns against it, even if the withdrawal is economically justified. This fear discourages reform and encourages expansion of schemes instead.

Another factor is administrative ease. Creating jobs, improving education, or building skills requires planning, monitoring, and coordination. In contrast, transferring money through direct benefit transfer systems is simple and efficient from an administrative point of view. With widespread bank accounts and digital systems, governments can deliver cash transfers easily. However, what is easy to deliver is often hard to exit. Once a scheme becomes part of people’s regular income, withdrawing it becomes politically dangerous.

The Survey then turns to the fiscal condition of states to show why this trend is worrying. Unconditional cash transfers currently range between zero point one nine percent to one point two percent of Gross State Domestic Product across states. In terms of state budgets, these schemes account for around eight point two six percent of total expenditure. This is happening even though many states are already running revenue deficits.

To understand this, it is important to know what revenue deficit means. Revenue expenditure includes spending on salaries, pensions, interest payments, and subsidies that do not create assets. Revenue receipts include income from taxes and fees that do not involve borrowing. When revenue expenditure exceeds revenue receipts, the state runs a revenue deficit. This means the government is borrowing just to meet its regular expenses.

When a state is already struggling to cover routine expenses, it becomes extremely difficult to invest in capital expenditure. Capital expenditure is what creates long term assets like roads, irrigation systems, hospitals, and schools. Without capital spending, economic growth slows down and future revenues suffer.

The Survey shows that state fiscal deficits have increased from around two point six percent of GDP three years ago to about three point two percent in the last year. Total outstanding debt of states has reached around twenty eight percent of GDP. More than sixty two percent of future state revenue is already committed to salaries, pensions, interest payments, and subsidies. This leaves very little room for development spending.

An example makes this clearer. If a household earns ten thousand rupees a month but its basic expenses are twelve thousand rupees, it must borrow two thousand rupees every month just to survive. Over time, debt keeps increasing and no savings or assets are created. States are now in a similar situation. They are borrowing to fund routine expenditure, including freebies, with no clear path out.

This raises serious questions about India’s ambition to become a developed economy by 2047. Development requires sustained investment in human capital and infrastructure. If fiscal resources are tied up in unconditional transfers, long term goals become harder to achieve.

The Survey explains that this situation creates a difficult trade off. High spending on freebies increases revenue expenditure and limits capital expenditure. Critical sectors like health, education, infrastructure, and skill development suffer as a result. If governments want to maintain both high cash transfers and high capital spending, they must widen fiscal deficits even further. This would be even more dangerous for economic stability.

The choice, therefore, is clear. Do we prioritise short term relief or long term growth. This choice is not just for governments but also for citizens. Welfare is important, but it must support long term progress, not replace it.

The Survey does acknowledge that freebies have had some positive effects. They have provided income support to poor households, boosted consumption, and helped absorb shocks during crises such as the COVID pandemic. They have also helped people cope with inflation and income loss. However, the problem is that these benefits have not translated into long term improvements in nutrition, education outcomes, or poverty reduction.

Evidence suggests that when cash transfers are stable but unconditional, they do not necessarily lead to better human development indicators. Instead of becoming ladders that help people climb out of poverty, freebies often remain safety nets that keep people dependent on state support.

Another important concern raised is the impact on labour participation. When transfers form a significant share of household income, incentives to work can decline. This effect can be particularly strong if employment opportunities are informal, low paid, or uncertain. Over time, this can weaken productivity and growth.

This is where the Survey introduces the example of Brazil as a possible model. Brazil transformed its welfare system by linking cash transfers to specific conditions. Under its BolsaFamilia programme, families received financial support only if children attended school regularly, vaccinations were completed, and health checkups were done. There was strong monitoring, regular audits, and clear exit pathways.

As a result, school attendance rates improved significantly between 2001 and 2015, especially among children aged fifteen and sixteen. Conditional transfers helped build human capital while maintaining fiscal discipline. Similar models exist in Mexico and the Philippines, where welfare schemes are designed to encourage education, health, and skill development rather than passive dependence.

The lesson from these examples is clear. Welfare works best when it is designed as a ladder, not a crutch. Conditional cash transfers can protect the vulnerable while also encouraging long term development. They ensure that public money creates future capacity rather than permanent liabilities.

The Economic Survey does not argue for ending welfare. Instead, it calls for redesigning welfare. The focus should be on outcomes, accountability, monitoring, and exit strategies. Freebies without purpose weaken state finances and limit growth. Welfare with direction strengthens both society and the economy.

By bringing this issue into the Economic Survey, the government has shifted the debate from politics to policy. The challenge now lies in whether states and citizens are ready to make difficult but necessary choices for sustainable growth and development.

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