FISCAL RESPONSIBILITY VS SOCIAL SAFETY NETS: LESSONS FROM THE LADKI BAHIN CONTROVERSY

Why In News?

The Bombay High Court ruled that statutory obligations (like pensions) must be given legal and fiscal priority over discretionary populist schemes like Mukhyamantri Majhi Ladki Bahin Yojana.

What is the Ladki Bahin Yojana Controversy?

Maharashtra Government launched the Mukhyamantri Majhi Ladki Bahin Yojana in 2024 to provide ₹1,500 monthly to eligible women aged 21-65 from economically weaker backgrounds.

The controversy revolves around financial strain on the state exchequer and widespread enrollment of ineligible beneficiaries.

• Fraudulent Beneficiaries: State scrutiny removed 2.6 million ineligible names. Findings include over 14,000 men posing as women (costing ₹21.44 crore) and over 2,400+ government employees illegally claiming benefits.
• Financial Impact: With an annual burden of ₹46,000 crore, the scheme has forced the government to divert funds from other sectors, including subsidies and development funds. 

In April 2026, the Bombay High Court questioned the scheme's financial sustainability, criticizing the state for prioritizing large-scale cash transfers over critical obligations like salaries and pensions.

Why Do Governments Expand Social Safety Nets?

Mitigating Economic Shocks: Governments expand safety nets as shock absorbers for the informal sector, which comprises over 90% of the workforce and lacks benefits.

• Crisis Response: Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) provided free food to 80 crore people during COVID-19 to prevent starvation.
• Rural Stability: MGNREGA acts as an automatic stabilizer, setting rural wage floors during economic or climate-related distress.

Enabling "Rights-Based" Entitlements: Shift from discretionary charity to legally enforceable rights, making reversals politically and legally challenging.

• Statutory Obligations: Laws like the National Food Security Act (NFSA), 2013 and MGNREGA (2005) mandate food and work provisions, ensuring budgets grow with population and inflation.
• Judicial Enforcement: Supreme Court rulings, such as in the "Right to Food" case, have forced the expansion of malnutrition-focused programs like Mid-Day Meals and Integrated Child Development Services (ICDS).

Leveraging Digital Public Infrastructure (DPI): Digital tools have lowered delivery costs and leakages, enabling fiscally viable, broad-based cash transfer expansion.

• Fiscal Efficiency: The "JAM Trinity" (Jan Dhan-Aadhaar-Mobile) enabled Direct Benefit Transfers (DBT), saving the exchequer over ₹2.7 lakh crore by 2024 through the removal of fake beneficiaries. (Source: PIB)
• Rapid Scalability: According to the International Labour Organization (ILO), India’s social security coverage increased by over 45% in a decade, rising from 19% in 2015 to 64.3% in 2025.

Managing "Transient" Poverty: Because Indian poverty is fluid, with families cycling in and out due to shocks, safety nets must reach beyond the chronically poor.

• Vulnerability: India Human Development Survey (IHDS) data indicates many remain at risk from single adverse events, justifying broad schemes like Ayushman Bharat.
• Health Safeguards: PM-JAY addresses the 60 million Indians pushed into poverty yearly by healthcare costs.

Encouraging Economic Reform: Safety nets mitigate the immediate impact of structural shifts.

• Replacing Subsidies: Targeted cash transfers, such as PAHAL for LPG, allow for fuel price deregulation while protecting the poor from market distortions.

How Fiscal Responsibility Comes Into Conflict with Welfare Scheme? 

"Crowding Out" of Capital Expenditure: Fiscal responsibility dictates investing in income-generating assets, whereas welfare is classified as consumption-oriented revenue expenditure.

• The Conflict: According to the RBI State Finances Report, many states allocate 25-30% of revenue to subsidies and interest, leaving minimal funds for infrastructure like roads or power plants. 

Rising Debt and Interest: Fiscal prudence requires a stable debt-to-GDP ratio. Unfunded welfare schemes increase borrowing requirements.

• The Debt Trap: Higher debt shifts spending from welfare to interest. In the 2026-27 Union Budget, interest remains the top expense at 26%.

Inflationary Pressure: Fiscal prudence maintains low inflation, but massive welfare payouts expand money supply without increasing production.

• The Tension: Demand exceeding production causes price hikes that hurt the poor, nullifying welfare benefits.

Economic and Resource Impacts: Fiscal prudence supports market efficiency, whereas some welfare initiatives risk resource misallocation.

• Consequences: Policies like free electricity for farmers trigger groundwater over-extraction and the financial failure of power utilities (DISCOMs), creating "hidden" deficits that necessitate government bailouts.

FRBM Target Violations: The Fiscal Responsibility and Budget Management (FRBM) Act mandates borrowing limits, a 3% Fiscal Deficit cap for states. 

• Legal Conflict: Expanding welfare breaches these limits. The RBI notes that welfare-driven borrowing has pushed some states' debt-to-GSDP ratios to unsustainable levels, creating fiscal vulnerability.

Way Forward 

Legal Distinction between "Merit" and "Freebie": Governments must legally separate "merit goods" (health, education) from "private transfers" like cash for votes.

• Update the FRBM Act to cap "non-merit" subsidies. As Per the 16th Finance Commission, states should end off-budget borrowings to enhance transparency.

The "Asset-Creation" Mandate: Shift welfare from pure consumption to asset creation.

• Tie welfare payments to labor that builds public assets (like MGNREGA building water tanks). This ensures every rupee spent on welfare also acts as an infrastructure investment.

Sunset Clauses for Subsidies: Welfare schemes should be finite.

• Implement "sunset clauses" to ensure subsidies automatically expire unless performance reviews justify re-approval, preventing temporary aid from becoming a permanent fiscal drain.

Fiscal Federalism: Improve accountability by decentralizing welfare delivery to local bodies.

• As Per the 15th and 16th Finance Commissions, link grants for Panchayats and Municipalities to performance criteria like audited accounts and property tax collection to encourage local revenue generation.

Dynamic Beneficiary Lists: Adopt dynamic data to exclude the "newly rich."

• Utilize real-time GST and Income Tax data to automatically remove beneficiaries exceeding the poverty line, concentrating resources on the needy.

Conclusion

Welfare and fiscal discipline must coexist through precise targeting and robust data architecture. The Ladki Bahin controversy proves that leaks, not intent, threaten sustainability. Success requires replacing political misuse with rigorous fiscal planning to ensure justice for the truly needy

Source: THE HINDU