States' social welfare spending to remain elevated at 2% of GSDP in FY26, says Crisil Ratings

New Delhi: Social welfare spending by 18 of India's largest states is expected to remain elevated at around 2% of their gross state domestic product (GSDP), or approximately ₹6.4 trillion, in FY26, Crisil Ratings said in a report on Thursday.

According to the rating agency, these states, including Maharashtra, Gujarat, Karnataka, Tamil Nadu, and Uttar Pradesh, together account for nearly 90% of the country’s aggregate GSDP.

However, the persistence of high welfare expenditure, supporting developmental goals, may lead to an elevated revenue deficit, thus curbing the financial flexibility of states to expand capital spending, the report warned.

The spending of the states, based on budget estimates for the current fiscal, is in line with last year’s levels but remains significantly higher than the 1.4–1.6% range seen between FY19 and FY24, it added.

According to the state budget classification, social welfare revenue expenditures include developmental outlays for backward classes, women, children, and labour, along with social security pensions for vulnerable groups.

“Social welfare expenditures in FY25 and FY26 are estimated to increase by about ₹2.3 trillion from FY24 levels. Of this, about ₹1 trillion is for direct benefit transfers (DBT) to women, primarily as election commitments,” said Anuj Sethi, senior director, Crisil Ratings.

The remaining ₹1.3 trillion increase is primarily for financial/ medical assistance to backward classes and social security pension to select focus groups, Sethi added.

According to Crisil Ratings, the rise in social welfare spending across FY25 and FY26 is expected to be uneven, with around half of the analysed states likely to witness a sharp increase, while the rest may see stable or only modest growth in such expenditure.

While social welfare spending continues to rise sharply, overall revenue expenditure is projected to grow at a robust 13–14% CAGR between FY25 and FY26, the rating agency said.

In contrast, revenue receipts grew at a slower pace of 6.6% last fiscal year and are expected to rise by only 6–8% this year, keeping revenue deficits elevated and pressuring state finances.

“Rise in revenue deficit normally results in state governments reducing capital outlay to maintain their fiscal stability. Last fiscal, capital outlay grew a meagre 6% on-year (vs a CAGR of 11% over 5 years ended fiscal 2024) as revenue deficit ballooned almost 90% on-year," said Aditya Jhaver, director, Crisil Ratings.

"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," Jhaver added.

Meanwhile, the rating agency cautioned that further increases in welfare allocations, without a matching rise in revenue receipts, especially ahead of upcoming state elections, could strain state finances and weigh on their long-term credit profiles.

The rating agency highlighted the need for continued fiscal prudence.

The analysis covers 18 major states such as Maharashtra, Gujarat, Karnataka, Tamil Nadu, Uttar Pradesh, Telangana, Rajasthan, West Bengal, Madhya Pradesh, Andhra Pradesh, Kerala, Odisha, Jharkhand, Haryana, Punjab, Bihar, Chhattisgarh, and Goa.