Q1. The fiscal consequences of competitive welfare expansion by States are no longer confined to sub-national budgets. Critically examine how state-level welfare populism can transmit fiscal stress to the national economy.
Analytical Focus for Answer (AFfA):
- Welfare expansion as a driver of rising state debt and persistent arrears.
- Role of State Development Loans in affecting bond yields and borrowing costs.
- Transmission of state fiscal stress to Centre’s fiscal space and market credibility.
- Sovereign risk perception by rating agencies and global investors.
- Long-term macroeconomic risks versus short-term electoral incentives.
Model Answer
Introduction
In recent years, welfare expansion by States has increasingly been shaped by competitive political incentives rather than calibrated fiscal capacity. What appears as a sub-national budgeting choice has gradually acquired macroeconomic significance, as rising state debt, persistent arrears, and growing reliance on market borrowings begin to interact with India’s overall fiscal stability. Consequently, state-level welfare populism now carries implications that extend beyond state finances to the national economy.
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- Political timing of schemes: Welfare announcements often coincide with electoral cycles, prioritising short-term visibility over fiscal sustainability.
- Absence of repayment planning: Expansion rarely accounts for legacy liabilities or medium-term debt servicing capacity.
- Arrears as hidden deficits: Delayed payments to contractors, hospitals, and beneficiaries conceal underlying fiscal stress.
- Debt accumulation pattern: States pursuing aggressive welfare expansion tend to record higher debt-to-GSDP ratios.
- Inter-state divergence: High-debt states such as Punjab and Himachal Pradesh contrast with fiscally prudent states like Odisha and Gujarat.
- Intergenerational burden: Borrowing-financed welfare shifts fiscal costs to future governments and taxpayers.
- Market borrowing dependence: Welfare spending increasingly relies on State Development Loans.
- Yield pressure effect: Higher SDL issuances raise yields, increasing borrowing costs for states.
- Crowding-out risk: Rising yields compress fiscal space for capital and developmental expenditure.
- Integrated sovereign assessment: Rating agencies assess Centre and states as a consolidated fiscal entity.
- Cost of capital transmission: Elevated sub-national borrowing stress can spill over into higher central borrowing costs.
- Macroeconomic signalling: Persistent arrears and off-budget liabilities undermine market confidence.
- Service delivery breakdown: Underfunded schemes eventually harm beneficiaries through delays and uncertainty.
- Policy inconsistency risk: Abrupt withdrawal of schemes to fund new promises destabilises economic planning.
- National exposure: Cumulative state-level stress weakens India’s overall fiscal resilience.
Conclusion
State welfare populism, when detached from fiscal realism, ceases to be a purely sub-national concern and becomes a national economic vulnerability. Rising debt, market borrowing pressures, and adverse sovereign risk perceptions transmit instability across India’s public finance architecture. Sustainable welfare delivery therefore demands disciplined fiscal design that balances political objectives with long-term macroeconomic stability.
Q2. Calls for a National Welfare Policy raise questions about federal balance in India. Analyse the case for a nationally guided welfare framework while assessing its implications for State autonomy and democratic accountability.
Analytical Focus for Answer (AFfA):
- Fragmentation of welfare delivery under competitive state politics.
- Need for national principles on fiscal discipline, transparency, and continuity.
- Lessons from concurrent-list subjects like education governance.
- Risks of centralisation versus benefits of a national baseline.
- Balancing citizen entitlements with cooperative federalism.
Model Answer
Introduction
The growing fiscal stress associated with fragmented welfare expansion has revived calls for a National Welfare Policy in India. While welfare remains a constitutionally shared responsibility, the absence of common fiscal and governance principles has allowed competitive populism to undermine continuity, transparency, and sustainability. This raises a critical federal question: how to introduce national coherence in welfare policy without eroding State autonomy.
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- Policy inconsistency: States pursue divergent welfare priorities without shared fiscal benchmarks, leading to uneven outcomes.
- Fiscal opacity: Arrears, deferred payments, and long-term liabilities often remain outside public scrutiny.
- Continuity risks: Welfare entitlements fluctuate with electoral cycles rather than evidence-based evaluation.
- Shared fiscal discipline: A national framework can set principles for debt transparency, fiscal sustainability, and disclosure norms.
- Continuity of entitlements: National guidance can protect existing schemes from abrupt disruption.
- Citizen-centric governance: Uniform reporting standards enhance democratic accountability to beneficiaries.
- Concurrent list lessons: Education governance shows how national baselines can coexist with State implementation autonomy.
- Framework-based coordination: Instruments like the RTE Act and NEP 2020 set standards while permitting local innovation.
- Avoiding centralisation: A welfare policy must guide rather than dictate State choices.
- Cooperative federalism: Shared norms can improve fiscal credibility without undermining State diversity.
Conclusion
A National Welfare Policy, if designed as a principles-based framework rather than a centralised mandate, can reconcile fiscal prudence with federal autonomy. By ensuring transparency, continuity, and disciplined expansion of welfare entitlements, it can stabilise citizen welfare and public finances while preserving the constitutional spirit of cooperative federalism.