Social welfare spending by top states to stay high at 2% of GSDP in FY26: CRISIL Ratings

Spending on social welfare schemes by the top 18 states is expected to remain high at 2% of gross state domestic product ( GSDP), amounting to Rs 6.4 lakh crore, in FY26, Crisil Ratings said on Thursday. However, this will result in high revenue deficit and therefore limit capital expenditure by states, it noted.

Between FY19 and FY24, social welfare expenditure was 1.4-1.6% as a share of GSDP, and rose to 2% in FY25.

"Rise in revenue deficit normally results in state governments reducing capital outlay to maintain their fiscal stability," said Aditya Jhaver, director at CRISIL Ratings.

Last fiscal, capital outlay grew a meagre 6% on-year (vs a compound annual growth rate of 11% over 5 years ended fiscal 2024) as revenue deficit ballooned almost 90% on-year, he noted.

Jhaver warned that if this trend continues this fiscal, it could constrain states’ capital outlay -- which has a higher multiplier effect and can stimulate increased investment in the economy.

Revenue expenditure is budgeted to record a CAGR of 13-14% between fiscals 2025 and 2026, said Crisil.

In contrast, revenue receipts grew by 6.6% on-year last fiscal and are expected to increase 6-8% on-year this fiscal, keeping revenue deficit elevated, it added.

Of the total projected welfare spending by states, Rs 1 lakh crore will go towards direct benefit transfers (DBT) for women as election commitments, said Crisil.

In recent years, several states have introduced or expanded allocations to DBT schemes.

“With upcoming elections in other states, a rise in DBT, as part of election commitments, is possible and remains a key monitorable,” said Crisil.

The analysis covers states like Maharashtra, Rajasthan, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, West Bengal and Kerala, among others.

Anuj Sethi, senior director at CRISIL Ratings, said, “Rs 1.3 lakh crore increase (in social welfare expenditure) is primarily for financial/ medical assistance to backward classes and social security pension to select focus groups, which supports necessary expenditures for socio-economic development."

However, Crisil highlighted that the rise in social welfare spending in this fiscal will not be uniform across states. While 50% of analysed states are expected to see a “significant surge” in the spending, others will record a modest increase, it said.