Economists Diverge on Effectiveness of Cash Transfers in Stimulating Spending

Cash Transfers in India: Economists Divided Over Effectiveness

Economists are at odds over whether cash transfers can shield India's poorest households from a cost-of-living crisis. While some argue that a median monthly payout of Rs 1,500 provides crucial support for consumption, others claim it is insufficient to fill the gap left by stagnant rural wages, high energy costs, and the potential adverse impact of El Nino weather patterns.

According to a note by economists at Crisil, cash transfers by states, coupled with the Centre's welfare benefits, can cushion household consumption in the current fiscal, despite inflation risks from high energy prices and El Nino. This assertion is based on data from the Household Consumption Expenditure Survey (HCES) 2023-24. Crisil found that for households in the bottom 20 percent consumption segment, a monthly cash transfer of Rs 1,500 could cover 74 percent of monthly expenditure in rural areas and 51 percent in urban areas (based on prices of 2023-24).

However, other economists disagree with this argument. "Income growth fuels consumption. If El Nino and high energy prices are stoking inflation, which is rising at a rate higher than income growth, consumption won’t be able to grow at the same pace," said Dhiraj Nim, an economist at ANZ Banking Group. "It’s hard to imagine a sum of Rs 1,500 a month would offset the loss of purchasing power in the wake of high inflation."

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Comparison of Casual Labourers' Earnings in Rural and Urban Areas

The Periodic Labour Force Survey (PLFS) annual report for 2025 showed that daily earnings of casual labourers in rural areas averaged Rs 435 per day for males and Rs 305 per day for females. In contrast, urban areas saw male earnings grow by 3.5 percent year-on-year in 2025, while female earnings inched up by 2.8 percent.

Seventeen states will provide monthly cash transfers to households this fiscal year, far more than the four in 2019. Although the quantum of monthly cash transfers varies across states, the median amount handed out every month is Rs 1,500. The cash transfer is aimed at low-income households with income thresholds ranging from Rs 1 lakh to Rs 3 lakh per annum.

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According to Crisil, if Rs 1,500 is provided monthly to rural households that spend between Rs 1,677 and Rs 2,473 (bottom 20 percent) per month on consumption, 74 percent of their expenditure will be covered. In urban areas, if Rs 1,500 is provided monthly to households who spend between Rs 2,376 and Rs 3,687 per month on consumption, 51 percent of their expenses will be covered.

Many economists say that while a Rs 1,500 sum can provide some support to consumption for low-income households, it cannot offset the impact that high inflation has on purchasing power. "If retail inflation inches closer to 6 percent in FY27, it will have a big impact on denting consumption of low-income households," said Radhika Piplani, Chief Economist, Motilal Oswal Financial Services.