The Trilemma of Direct Benefit Transfers and Welfare Fiscal Policies  on Governments During Inflation

Mansi Tirthani

Background

Over the past decade, India’s welfare mechanism at macro economic level, has transitioned from indirect, leaky based subsidies into a more direct and digitized version focusing on asset and cash distribution networks. Based on the already existing sound infrastructure of the JAM (Jan Dhan Aadhaar Mobile) trinity, Direct Benefit Transfers (DBT) in India have expanded exponentially. 

In the current fiscal policy, the central government executes 310 schemes across 54 ministries. Where cumulative DBT has already crossed a baseline of ₹50 lakh crore ($520 billion) since the inception of the DBT platform. In addition, state governments have simultaneously utilized regional specific cash transfer architectures as primary mechanisms by including them often in state welfare policies. Ranging from pro-poor target schemes to cash disbursement to unemployed youth or sometimes using it as a weapon to win during elections. Simply for poverty mitigation, thousands of crores are routed directly into private commercial bank accounts every month which results in creating a high-density liquidity baseline for low-income households.

By April 2025, India’s DBT ecosystem had transferred Rs.43.35 lakh crore directly into the bank accounts of verified beneficiaries. More importantly, the system had prevented leakages amounting to Rs.3.48 lakh crore. These are the funds that would previously have been lost to duplicate records, fake identities and ghost beneficiaries. 

However, this modern digitized architecture is quietly resulting in an unyielding macroeconomic adversary by persistent supply side inflation. In developing economies like India, where low-income households allocate between 45% and 55% of their total disposable income on food and essential fuel, inflation acts as a regressive and un-legislated tax. 

When international crude prices fluctuate or domestic food supply suffers by frequent climate based shocks it ensues in domestic price rises that erode the true economic value of fixed nominal currency distributions. 

The main challenge of  present imported inflation for fiscal policy makers and economists is no longer logistical leakage or duplication of beneficiaries but it is embedded in the structural erosion of the real money value of cash transfers which is getting skewed under the weight of inflation with added decline in India’s social sector budgets (Fig.1).

Functioning

India’s social safety net splits into primary modalities where central targeted conditionalities are tracked under the Gender Budget Statement (GBS) and state level income buffers. At national level the overall Gender Budget allocation has hit a historic high at 9.37% of the total Union Budget expenditure, marking an 11.55% increase from the previous fiscal cycle across 53 ministries.

Figure 2. Source: Report – A Quantitative Assessment of India’s DBT System 

Fig. 2 reveals that India’s Direct Benefit Transfer (DBT) system, implemented in 2013, has redefined welfare delivery by enhancing transparency, curbing leakages, and ensuring precise fund distribution. 

The distribution further evaluates schemes across three core divisions:

• Part A (100% women beneficiaries): Constitutes 21.50% of the gender budget, covering flagship programs like the Pradhan Mantri Awas Yojana (PMAY-Gramin) and Mission Shakti.
• Part B (30% to 99% women beneficiaries): Constitutes the largest share at 72.54%, capturing massive interventions like MGNREGA.
• Part C (Less than 30% women allocation): Constitutes 5% to capture the wider gender footprint of programs like PM-KISAN.

By eliminating the middle-men and duplicate profiles, the DBT architecture has achieved savings of ₹3.48 lakh crore, driven by biometric de-duplication in food subsidies (₹1.85 lakh crore saved), PAHAL LPG subsidies (₹73,443 crore saved), and MGNREGS wage pipelines (₹42,534 crore saved). The Government’s Welfare Efficiency Index (WEI) score consequently grew from 0.32 in 2014 to 0.91 which means that 91 paise of every Indian rupee of welfare now lands directly with citizens.

But when the Indian Rupee depreciates against the US dollar, the cost of imported components, particularly fertilizers, crude oil and edible oils surges. This directly leads into higher retail prices that dilutes the actual purchasing capacity of every rupee distributed affecting middle and lower income individuals disproportionately. Under this reality, if a localized consumer price index surges due to currency depreciation while nominal welfare transfer values remain fixed, real purchasing power contracts directly, forcing a reduction in real household consumption.

Evaluation

The Triple Fiscal Dilemma  (The Trilemma)

This repercussions creates a short term, non-linear challenge for policymakers and governments, a fiscal trilemma where solving any two parameters inevitably breaks the third. The three competing dimensions of this trilemma include:

First dilemma: Managing resilient inflation or DBT

When domestic inflation rises taking into consideration the present consequences of imported inflation, the baseline of household expenditure collapses for families living on the margin. Because these households have zero marginal propensity to save and a high marginal propensity to consume essentials. Price increases trigger immediate nutritional compression. The government is forced into defensive intervention, deploying fiscal instruments to stabilize domestic markets, often at the cost of expanding broad money velocity or increasing resource constraints.

To protect citizens from rising currency costs, the Central government is planning to increase its expenditure on fertilizer and food subsidies. Because fertilizer as a raw material is largely imported commodity. If the government absorbs this price surge to protect farmers, it leaves less fiscal portion in the annual budget to launch new welfare or continuing existing cash transfer schemes. 

Second dilemma: Compulsion to expand DBT  or to protect real consumption

To preserve the survival of masses whose consumption indices are falling, governments face intense political and economic pressure to step up new DBT allocations or boost the existing ones. Whether by monthly state transfer from ₹1,000 to ₹1,500 (such as the recent expansion in state level Ladli Behna Yojana) or widening in-kind grain allocations under the National Food Security Act. 

The objective is clear to artificially push disposable household income to keep pace with surging costs. However, doing so injects more liquidity back into the retail ecosystem, risking a classic demand pull inflationary loop.

Third dilemma: Exhaustion of capital and subnational debt traps

Because state revenues (primarily derived from SGST and state excise) are inelastic in the short term. Any further adjustment in inflation or expansion of cash transfers drains the financial resources available for everything else. 

This leaves little to no fiscal space for capital expenditure (CapEx) like constructing irrigation systems, roads, or renewable energy grids. To maintain these essential infrastructure investments while funding expanded cash commitments, states are forced to borrow large debts from open markets. Which in turn  pushes their debt to GSDP ratios cross thresholds limits and risks long-term or silently defunding of the welfare policies.

Emerging Issues

• Inelasticity of Revenue Receipts: Unlike the central government, which can leverage corporate tax collections or multi-sectoral cesses, states rely on narrow margins with revenue bases. When a state allows 15% to 20% of its own tax revenue (OTR) for monthly cash transfers, its capacity to absorb macroeconomic shocks drops to near zero. Which affects the welfare schemes and cash transfers directly sometimes by discontinuing them that again make the survival difficult.
• Crowding out of high-multiplier capital investment: Fiscal research shows that every rupee spent on capital/long-term asset creation, it definitely leads to a long-term economic multiplier effect of approximately 2.5x to 3.5x. Whereas revenue expenditure via un-targeted consumption transfers rests on multipliers of only 0.9x to 1.2x. Hence, prioritization of the latter structurally reduces the economy’s long-term potential growth rate.
• Asymmetric inflation indexation: Work-based safety nets like MGNREGA feature institutionalized, state-specific annual wage corrections via CPI-AL (Consumer Price Index for Agricultural Labourers) but social security pensions, unemployment allowances and maternal health transfers remain largely unindexed. This creates an unequal social security where the most physically vulnerable groups bear the worst effects of currency depreciation.

Way Forward

Resolving this macro-fiscal trilemma requires moving away from short-term electoral budgeting toward a structural and formal way of public finance management. 

First, state administrations must transition from unconditional cash transfers to productive models. Cash transfers should be tied to measurable human capital outcomes, such as verifiable vocational skill completion rates or participation in local communities. This shifts the expenditure from a consumption drain into a strategic investment in human capital.

Second, India must establish an independent Subnational Fiscal Responsibility Framework that sets clear legal ceilings on revenue-expenditure transfers as a percentage of a state’s Tax Revenue. When states plan to expand welfare transfers during high-inflation periods, they should be mandated to fund them by broadening their local tax bases or cutting non-merit subsidies, rather than relying on high-interest market borrowings.

Fiscal stability can be further reinforced by building a dual-way of delivering welfare. Under this model, essential nutritional security should be insulated through in-kind provisions (such as fortified foodgrains and clean cooking energy) while financial autonomy is maintained through CPI-indexed baseline cash transfer. This balanced approach can protect vulnerable households from currency shocks without destabilizing subnational public finances.

References

Cabinet Secretariat, Government of India. (n.d.). DBT Bharat dashboard: Financial details. Ministry of Electronics and Information Technology. Retrieved June 21, 2026, from https://dashboard.dbt.gov.in/dashboard/financial

Cabinet Secretariat, Government of India. (n.d.). Direct Benefit Transfer (DBT) Bharat portal. Ministry of Electronics and Information Technology. Retrieved June 21, 2026, from https://dashboard.dbt.gov.in/

Ministry of Finance, Government of India. (2026). Expenditure profile: Statement 13 (Gender Budget). Union Budget 2026-27. Government of India Portal. https://www.indiabudget.gov.in/doc/eb/stat13.pdf

Ministry of Women and Child Development, Government of India. (n.d.). Union Gender Budget statement. Mission Shakti Portfolio. Retrieved June 21, 2026, from https://missionshakti.wcd.gov.in/gender-budgeting/union_gender_budget_statement

International Institute for Population Sciences (IIPS). (2021). National Family Health Survey (NFHS-5), 2019–21: India report. Ministry of Health and Family Welfare, Government of India. https://dhsprogram.com/pubs/pdf/FR375/FR375.pdf

About the Author:

Mansi Tirthani is the recipient of the National Award by the President of India for her contributions to community services. She has been Indian Youth Ambassador to China by Government of India to analyse startup and innovation ecosystem. Currently serves with the Research and Editorial team with a renowned policy think tank, where her work centers on evidence-based governance and policies analysis. With a strong commitment to advancing gender equity and welfare governance, she brings together rigorous data analysis, strategic communication and development to impact research and policy.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.

Acknowledgement: This article was posted by Yashkirti Pal, a Research and Editorial Intern at IMPRI.

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