Victory Cheers, Debt Tears
By Shivaji Sarkar
The Bihar election delivered a clear mandate, but the celebrations mask a harder truth: the state is walking into a period of acute fiscal strain powered by an explosion of welfare promises. The politics worked; the economics now begins to bite.
The immediate political gains from targeted benefits and cash transfers are undeniable. They create visible impact, reach millions quickly, and generate electoral goodwill. But the economic price of these commitments is now coming into sharper focus.
There is a sharp political question as well. The mandate though massive has peculiarities. Groups in the Opposition despite higher votes get fewer seats. Those with the power surprising did very well with least or no losses. Some like the Asadullah Owaisi’s MIM has got returned five of the six contestants. And LJP-RV has windfall of 19 seats against one in the last Bihar house. A miracle indeed!
It is to be observed how such a massive mandate would impact or reshape Bihar’s economy. Early assessments suggest that the NDA’s new welfare promises could cost over Rs 40,000 crore in FY26—approximately 4 per cent of Bihar’s GDP, Rs 2 lakh crore in five years. For a state already operating with tight fiscal margins, this is not just a budgetary challenge; it signals a structural shift in how development would be financed or get constrained.
Bihar’s public debt has surged to Rs 4.06 lakh crore, with the state paying or Rs 63 crore in daily interest or Rs 23014 crore for 2025-26. It plans net borrowings of Rs 32,918 crore, pushing its debt-to-GDP ratio to nearly 40 per cent —one of the highest in India. Much of Bihar’s capital receipts now come from loans.
This is despite the state recording strong nominal GDP growth of roughly 11 per cent over the past decade. Alongside public liabilities, microfinance debt has also climbed, with outstanding loans reaching Rs 57,712 crore by March 2025.
The Rise of Fiscal Populism
Bihar is not alone in adopting expansive welfare promises. Across India, welfare spending has become central to election campaigns. But Bihar’s situation is distinct because of its economic baseline: low per-capita income, limited industrialisation, high dependence on central transfers, and a workforce heavily reliant on migration. In such a context, the political incentive to use welfare as a compensatory mechanism becomes overwhelming.
The election underscored this shift. Cash transfers for women, free electricity units, employment stipends, and expanded social-security schemes energised voter turnout. For large sections of the electorate, these benefits are not luxuries—they are substitutes for absent incomes, unstable livelihoods, or failing public services. Welfare spending that compensates for structural weaknesses is difficult to reverse, politically toxic to reform, and economically expensive to sustain.
A Budget Under Pressure
Bihar’s fiscal architecture leaves little room for manoeuvre even in stable years. The revenue support is dwindling. Capital expenditure—roads, power, irrigation, infrastructure—depends heavily on central allocations or external borrowings. An aside more the capital expenses more are shadowy unrecorded expenses.
Over the past decade, Bihar has received far higher central financial support under the NDA government compared to the UPA period. Between 2004–2014, Bihar received about Rs 2.8 lakh crore, whereas between 2014–2024 it received roughly ¹ 9.23 lakh crore—a threefold increase.
The addition of Rs 40,000-plus crore in welfare commitments dramatically narrows fiscal flexibility. To finance these schemes, Bihar must do one of three things: Borrow more, increasing its debt-to-GSDP ratio, cut capital spending, slowing long-term growth, depend even more on central transfers, reducing autonomy. Higher borrowing inflates debt servicing, reduced capex suppresses employment and growth, and heavy dependence on the Centre erodes Bihar’s independent policy capacity.
The Freebie Trap: Political Consumables
Economists often distinguish between welfare that builds capacity and welfare that buys political loyalty. The former includes school meals, health investments, education subsidies, and skill-building programmes. The latter tends to involve unconditional cash transfers, consumption subsidies, or politically timed giveaways.
Bihar’s new welfare package contains some elements of capacity building but is largely tilted toward political consumables. When welfare becomes permanent and productivity remains stagnant, a state risks entering a freebie trap: rising fiscal commitments without corresponding increases in economic output.
It can result in lower labour force participation, stunted private investment and chronic fiscal deficits, forcing more borrowing and higher interest burdens. For Bihar, which needs sustained private investment, industrial clusters, and job-rich growth, this trade-off is particularly severe.
The Opportunity Cost
Bihar’s development challenge has always been structural: how to generate jobs within the state so workers don’t have to migrate. The NDA’s manifesto promise of 10 million jobs is ambitious, but job creation on this scale requires deep reforms—industrial land availability, reliable power, simplified regulations, agro-processing capacity, and public-private partnerships.
Every rupee diverted toward recurring welfare is a rupee not invested in these foundations. Large welfare schemes create an illusion of progress—mask the absence of long-term reforms. This is where the political-economy risk becomes visible. Welfare can secure the next election, but development secures the next generation. When political incentives favour the former over the latter, states stagnate.
Macro-Economic Spillover: Implications for India
Bihar’s fiscal stress matters not only for the state but for India’s broader economic trajectory. The most populous state’s economy shapes external migration, national labour markets, consumption demand, and welfare expenditure patterns across the Hindi heartland. If Bihar’s growth slows because of fiscal overextension, three national-level effects may follow: greater pressure on central finances, as Bihar seeks more grants and transfers; slower demographic dividend realisation, as a large young workforce remains underemployed.
It promotes a competitive populism syndrome. The Centre faces a difficult balancing act. Too much central support could embolden other states to pursue fiscally unsustainable models.
What Bihar Must Do
Bihar must rationalise welfare, broaden revenues, and prioritise growth-focused capital investment to avoid fiscal strain and convert election promises into sustainable development. Without clear prioritisation, Bihar risks drowning in its own promises.
The Bihar election has reshaped the political landscape, but it has also placed a heavy economic burden on the state’s future. Welfare-driven politics may deliver votes, but it may not deliver the development Bihar desperately needs.
The next five years will determine whether Bihar uses its political mandate to break from the freebie trap—or sinks deeper into it. The fiscal path it chooses is no longer just a state issue; it is a national economic variable with implications far beyond Patna. — INFA