India’s Welfare Push: The Growing Cost and Impact of Subsidies on Development

India’s subsidies are far larger and more complex than official data suggests, with states driving rapid growth through expanding welfare schemes. While essential for social support, poor targeting and rising costs risk straining finances and crowding out long-term development spending.

India’s vast system of subsidies is under fresh scrutiny. A new report by the Asian Development Bank (ADB), prepared with PricewaterhouseCoopers (PwC) India and academic inputs from the University of Lisbon, takes a deep look at how subsidies and transfers are shaping the country’s economy. As India aims to become a developed nation by 2047, the study raises a crucial question: are subsidies helping growth, or quietly slowing it down?

Subsidies are everywhere in India’s economy. They lower the cost of food, electricity, fuel, and social services. They support farmers, protect vulnerable households, and help correct market failures. But the report argues that the debate is no longer about whether subsidies are needed. The real issue is whether they are working efficiently and reaching the right people.

Bigger Than They Appear

One of the report’s biggest findings is that subsidies in India are larger than official numbers suggest. Government data often underestimates them because many schemes are classified differently or excluded altogether, especially cash transfers.

By analysing detailed budget data from the central government and 21 major states, the study shows that the true scale of subsidies is significantly higher. These include not just traditional subsidies like food and fertilizer, but also direct cash transfers, housing support, and welfare schemes.

The result is a much broader picture of public spending, one where subsidies play a central and growing role in government finances.

States Are Driving the Surge

While central government subsidies rose sharply during the COVID-19 pandemic and then declined, the real growth story lies with the states. Over the past several years, state-level subsidies have steadily increased.

This rise is largely due to new welfare schemes, especially cash transfers aimed at women, farmers, and low-income households. Political competition has also played a role, with states introducing more benefits to attract voters.

This shift means states are now at the forefront of welfare spending in India. But it also raises concerns about how sustainable this trend is, especially as more schemes are added each year.

Who Really Benefits?

A key concern highlighted in the report is targeting. Ideally, subsidies should help the poorest and most vulnerable. In reality, that is not always the case.

Some subsidies, like food support, are relatively well-targeted and help address basic needs such as nutrition. Others, especially universal schemes like free electricity, often benefit richer households more because they consume more.

The report even finds that wealthier states tend to spend more on subsidies per person than poorer ones. This suggests that subsidies are not always reaching those who need them most.

Electricity subsidies are a major example. They are widely used but often poorly targeted. They also create hidden financial stress, as power companies incur losses that are not always shown in government budgets.

The Hidden Cost to Growth

Subsidies come with a trade-off. While they provide immediate relief, they can strain government finances over time.

The report finds that higher subsidies are linked to larger revenue deficits in states. Because subsidies are recurring expenses, they leave less room for investment in infrastructure, health, and education.

This is where the real risk lies. If too much money is spent on subsidies, governments may have less to invest in long-term growth. In simple terms, short-term welfare can sometimes come at the cost of future development.

There are also “hidden” subsidies, especially in sectors like electricity. Losses of state power companies often act as indirect subsidies, adding to the overall burden without being clearly visible.

Rethinking the Way Forward

The report does not argue for cutting subsidies altogether. Instead, it calls for smarter design and better targeting.

It suggests moving away from universal schemes toward targeted ones, using tools like Aadhaar-linked direct benefit transfers. It also recommends regular evaluation of schemes, better transparency, and the use of technology to track spending in real time.

International examples show that reform is possible. Countries like Brazil and Indonesia have shifted to targeted cash transfers, reducing costs while improving outcomes. India, with its strong digital infrastructure, is well placed to do the same.

The bigger challenge, however, is political. Subsidies are deeply tied to public expectations and electoral promises. Reforming them will require balancing welfare needs with fiscal discipline.

As India moves toward its long-term development goals, one thing is clear. Subsidies will remain a key part of the system. But how they are designed and delivered will determine whether they support growth or hold it back.