States' fiscal populism, cash transfers risk crowding out productive capex, Pg15

Key Highlights:

• The Economic Survey 2025-26 warns that fiscal populism and unconditional cash transfers (UCTs) by states risk reducing capital expenditure.
• Between FY19 and FY25, 18 states experienced a decline in their revenue balances, with 10 slipping into revenue deficit.
• In FY19, 19 states had a revenue surplus, which decreased to 11 states in FY25, raising the states' revenue deficit from 0.1% to 0.7% of GDP.
• Spending on UCT programs, especially for women, is projected to be around Rs 1.7 lakh crore for FY26.

Detailed Insights:

• Revenue expenditure, used for salaries and pensions, is less favorable than capital expenditure, which creates assets like infrastructure.
• The number of states implementing UCTs has increased more than fivefold between FY23 and FY26, with about half of these states in revenue deficit.
• Fiscal indiscipline at the state level can impact sovereign borrowing costs, as markets price government debt on a consolidated basis.
• Persistent revenue deficits or increased committed expenditure at the state level could negatively affect sovereign bond yields.
• UCTs take up most of the outlay, limiting the space for capital expenditure, which has a stronger and more lasting impact on growth.

Key Concepts Involved:

• Fiscal Populism: Government policies that use fiscal measures to gain popularity, often through increased spending or tax cuts.
• Revenue Deficit: The shortfall when a government's revenue is less than its expenditure.
• Capital Expenditure: Funds used by a company to acquire or upgrade physical assets such as property, buildings, or equipment.