Tamil Nadu's Welfare Model: A Turning Point in Subsidy Spending

Tamil Nadu’s welfare model is often at the centre of debates on “freebies” and fiscal stress , intensified everytime consumer goods appear in state election manifestos. In the upcoming polls too, consumer goods are part of major parties’ manifestos, with the AIADMK promising free refrigerators and the DMK offering a Rs 8,000 coupon to “non-Income Tax paying homemakers” to buy an electronic home appliance of their choice But how different is the state compared with others, and what is really changing in its welfare approach? No, Tamil Nadu is not an outlier in terms of subsidy spending, when we take an average view for the last few years. Since FY19, subsidies as a share of the fiscal deficit in Tamil Nadu have averaged around 36%, which is significantly lower than the average of major states (see chart) (around 47%) and broadly in line with fast-growing states (see chart) (around 38%). Between FY19 and FY23, this ratio remained below 40%. However, in the last two years, the share has risen to about 48% by FY25. This increase is significantly due to the introduction of monthly cash transfers, totalling to an annual burden of Rs 13,800 crore (13% of fiscal deficit). Subsidies are financial support provided by the government to consumers and/or businesses to maximise societal welfare. They can take various forms, for instance, offering loans to industries at below-market rates — or providing free/ highly subsidised ration. Freebie is a recent term that is used for certain types of transfers by the government such as distribution of free household appliances and laptops. Of late, there has been an introduction of cash transfers under which the government transfers a fixed amount of money directly into individuals’ bank accounts, either on a regular (monthly) basis or as a one-time payment. However, there is no single definition of “subsidy” in government documents. Tamil Nadu has a history of consumer goods transfers that traces back to 2006, when free colour televisions were distributed. This was followed by schemes such as free mixers, grinders and laptops (notably in 2011). More recently, the model has embraced cash transfers with the launch of the Magalir Urimai Thogai scheme in 2023, which provides ₹1,000 per month to women heads of households. How large is the fiscal burden of these schemes? Earlier, consumer goods distribution schemes were relatively limited in scale and often one-time expenses. For example, free laptops costed around Rs 758–800 crore in 2018. In contrast, the introduction of cash transfers has significantly increased the burden on the state exchequer. The Magalir Urimai Thogai scheme alone now accounts for about Rs 13,800 crore annually (FY25) and makes up roughly 27% of the state’s total subsidy expenditure. This represents a structurally higher and persistent fiscal strain. Tamil Nadu is part of a broader shift toward cash transfer-led welfare across states. In Madhya Pradesh, the Mukhyamantri Ladli Behna Yojana provides Rs 1,250 per month, to all married women whose family income is less than Rs 2.5 lakh, and accounts for about 34% of total subsidies. In Karnataka, the Gruha Lakshmi scheme provides Rs 2,000 per month, to female head of non-income tax paying family, and constitutes roughly 45% of subsidies. How much does a state’s economic capacity influence subsidies? States are expected to maintain fiscal deficit at around 3% of GSDP. Consequently, majority of states maintain it in a range of 2.5% to 4% of GSDP. Richer and more economically advanced states tend to sustain higher absolute subsidy spending. For instance, Tamil Nadu’s subsidy outlay is among the highest at around Rs 59,000 crore (FY25), while smaller states such as Himachal Pradesh spend significantly less, around Rs1,500 crore. At the same time, the structure of welfare varies. Some states focus on regular monthly transfers (such as Tamil Nadu, Karnataka and Madhya Pradesh), while others rely more on one-time transfers such as the Rs 10,000 transfer to women under Bihar’s Mukhyamantri Mahila Rojgar Yojana scheme in 2025. What could change going forward? Upcoming electoral promises suggest that cash transfer commitments could expand further. Proposals range from Rs 2,000 to Rs 5,000 per month, along with additional in-kind support such as grants of Rs 8,000 for household appliances. If implemented, these could increase the subsidy expenditure by two to five times, significantly raising the share of subsidies in the fiscal deficit and intensifying pressure on state finances. What is the overall takeaway? Tamil Nadu’s welfare model is not fiscally exceptional at present. Its subsidy burden, relative to the fiscal deficit, has historically been moderate and comparable to other states. However, the state is now at a turning point. The shift toward recurring cash transfers is increasing the weight of subsidies within the fiscal deficit and making expenditure more inflexible. Shishir Gupta is a Senior Fellow at the New Delhi -based think tank Centre for Social and Economic Progress (CSEP), while Rishita Sachdeva is an Associate Fellow.