NDA's Bihar Sweep Reinforces Freebie Politics, Pushes States Toward 3% Fiscal Deficit 'Floor' Despite these aggressive welfare promises, Bihar is already grappling with one of the most precarious fiscal positions in India.

The NDA's emphatic victory in Bihar has strengthened the political case for large-scale welfare payouts, even as economists warn that the surge in pre-poll freebies could severely strain state finances. Bihar, which recorded its highest-ever female voter turnout, saw the ruling alliance win over 200 seats, an outcome that analysts say was significantly shaped by cash grant schemes targeted at women.

"The Rs10,000 grant to women proved once again that freebies and populist spendings are now an inextricable part of state electoral dynamics," said Madhavi Arora, Lead Economist at Emkay Global Financial Services.

The major schemes announced by the Bihar government ahead of the elections are set to cost over Rs 400 billion in FY26, amounting to nearly 4% of the state's GDP, a figure higher than Bihar's total planned capital expenditure for the year.

"This outlay alone could be nearly 4% of Bihar's GDP. For context, this would be more than Bihar's budgeted capex outlay for FY26," Arora noted.

Despite these aggressive welfare promises, Bihar is already grappling with one of the most precarious fiscal positions in India. The state's fiscal deficit stood at 6% of GDP in FY25, and Emkay analysts point out that the FY26 target of 3% rests on what they call a "scarcely believable 22% nominal GDP growth assumption."

Data up to August, they add, shows the fiscal deficit already running 27% higher than the full-year estimate. Compounding the pressure, more than 70% of Bihar's revenue comes from central transfers, leaving little buffer to absorb swelling subsidy burdens.

"Bihar does not have a lot of its own tax revenue. The rising fiscal burden of these schemes will cause further strain on its already stretched fiscal position," Arora said in the report.

Freebie contagion spreads to 'good' states

The report notes that Bihar is not an outlier. Even states traditionally considered fiscally disciplined like Maharashtra and Odisha have rolled out sweeping welfare schemes in the past two years.

"Even so-called 'fiscally good' states such as Maharashtra and Odisha have caught the freebie bug," Arora said. Maharashtra's fiscal deficit rose by 40 basis points after the Ladki Bahin scheme, while Odisha's jumped by a full percentage point.

Odisha, which reported a fiscal surplus in FY22, is now nearing a 3% deficit. Maharashtra's deficit too has climbed close to the 3% threshold.

3% FD/GDP: From ceiling to floor

With Tamil Nadu, Kerala, and West Bengal heading into high-stakes elections next year, Emkay expects the "race to the bottom" in competitive populism to intensify.

"As a result, the 3% FD/GDP ceiling for states is now going to be the floor," Arora warns. "After two successive years of 3%+ deficits, we do not see this reduction anytime soon."

The analysis signals a worrying structural shift: that despite slowing revenues, growing welfare outlays are becoming politically indispensable—and fiscally unsustainable.

The big picture

The Bihar mandate may solidify a new political reality, one where cash transfers and pre-poll welfare schemes determine electoral outcomes more decisively than governance metrics or economic reforms. But as Arora and her co-author Harshal Patel caution, the fiscal costs are mounting fast.

With welfare spending surging across states irrespective of ruling party or financial health, India's subnational fiscal stress could soon become a national macroeconomic concern.