Over the past week I sat with a stack of very different headlines side by side - a proposed cash payout to women in Uttar Pradesh, an old World Bank note on how Indian states balance their books, a parliamentary panel’s numbers on school dropouts, and a district-level count of doctors in Bihar and UP. Read separately, they are four unrelated stories. Read together, they are one story – sustainability of growth.
A season of generosity
Uttar Pradesh’s government is reportedly weighing a cash payout of up to Rs 50,000 for women in the state, timed just ahead of the 2027 assembly election. The principal opposition, the Samajwadi Party, has countered with a promise of Rs 40,000. This is not an isolated UP story. Over the past three years, the number of states running large unconditional cash transfer schemes for women has gone from two to twelve, and by my reading of the available data, these twelve states will together spend around Rs 1.68 lakh crore on such schemes in 2025-26 alone - roughly 6% of their combined revenue expenditure. Add farmer and youth-linked transfers, and some estimates for women-focused transfers alone run closer to Rs 2 lakh crore across fourteen states.
None of this makes any single scheme wrong on its own terms. Direct transfers can be an efficient, leakage-resistant way to put money in the hands of households that need it, and I don’t doubt many families are genuinely better off for it. My concern, as an investor rather than as a commentator on any party’s politics, is arithmetic, not intent.
Where the money is going
A quick snapshot of what's on the table this
election cycle
Six of the twelve states running these schemes are already sitting on a revenue deficit in 2025-26. Strip out the cash transfer spending, and several of them - Karnataka and Madhya Pradesh among them - would show a revenue surplus instead. That gap is not academic. A revenue deficit means a state is borrowing to fund its day-to-day running costs, not its future.
The capex we’re quietly deferring
Zoom out to the national picture and the aggregate numbers still look reasonably disciplined - states’ combined gross fiscal deficit is budgeted at about 3.3% of GDP for 2025-26, broadly where it has held for two years, and outstanding state debt has actually eased slightly as a share of GDP. On the surface, fiscal prudence looks intact.
But the composition worries me more than the headline number. Over the past decade, a large share of the adjustment states have made to hit their deficit targets has come from squeezing capital spending - roads, power, water, hospitals, schools - rather than from trimming recurrent, non-development costs or from mobilizing more revenue. Capital investment has repeatedly acted as the shock absorber whenever a state needed to tighten its belt, in richer and poorer states alike. There are genuine signs of recent improvement - the ratio of revenue spending to capital outlay across states has come down from roughly 6.2 in 2015-16 to about 5.0 last year, which is progress. My worry is that this progress is fragile, and a fresh wave of poll-driven transfer commitments is exactly the kind of pressure that reverses it, because cash transfers are far easier to cut from next year’s capex line than from a promise already made to millions of women voters.
The children and the doctors we don’t have
While states debate the next round of transfers, the human capital numbers tell their own story. A parliamentary panel has just flagged that nearly 73% of Indian students drop out before completing higher secondary school. The number of schools shrinks at almost every stage as children get older - from about 9.1 lakh primary schools down to under 91,000 at the higher secondary level - and enrolment falls in step, from 6.18 crore children in primary classes to just 1.64 crore by the time they reach classes 11 and 12.
Forestation targets, a proxy for longer-horizon public investment discipline, have seen only about a fifth of the decade’s goal met.
Healthcare tells a similar story. India ranks 145th out of 194 countries on WHO health parameters, and the shortfall is starkest exactly where the new cash schemes are being rolled out. Against a WHO benchmark of one doctor per 1,000 people, rural India averages one per roughly 11,000; Bihar is close to one per 28,000, and Uttar Pradesh near one per 20,000. By one estimate, India needs another 6 lakh doctors, 20 lakh nurses and 2 lakh dental surgeons just to close the existing gap - a gap Gujarat’s own recent numbers put in sharp relief, with close to 80,000 new cancer cases and over 43,000 deaths from the disease in a single year.
I don’t read any of this as an argument against welfare spending as a category. I read it as evidence that the current mix of state spending is tilted toward transfers that buy loyalty “this election cycle”, at the expense of the schools, hospitals and roads that would have built durable growth over the next one.
Who actually pays for this
The other half of this equation is who is funding it. Personal income tax has now overtaken corporate tax as India’s single largest source of direct tax revenue, with net direct tax collections crossing roughly Rs 24 lakh crore in 2025-26. That burden sits overwhelmingly on the organized, salaried middle class - a narrow base of taxpayers now effectively out-contributing corporate India, while agricultural income of any size remains untaxed and a large informal economy stays largely outside the net. The compliant formal sector - salaried professionals and organized businesses - carries a growing share of the state’s obligations, including the welfare commitments being made on its behalf without much reference to its own capacity to keep paying.
My takeaway for investment strategy
This is not an immediate crisis - state balance sheets remain broadly sustainable and debt ratios are not alarming today. But sustainability is a medium-term question, not a one-year one, and the direction of travel worries me more than the current level. A political economy that finances consumption ahead of capacity, and funds it by leaning harder on a narrow, already-stretched taxpayer base, is not a formula for the kind of broad-based, decade-long growth story that equity markets like to price in.
For portfolio positioning, I continue to prefer businesses and sectors with pricing power and limited dependence on state fiscal transfers to sustain demand - I’d be cautious of consumption plays whose growth story leans heavily on scheme-driven cash rather than organic income growth. I also continue to doubt a case for holding long-duration debt, given that state finances, like the broader macro picture I have written about before, look calmer on the surface than they may prove to be underneath.