As Bihar gears up for the second phase of state elections, economist and investor Ruchir Sharma has an important concern to raise. “Bihar seems to be getting stuck in a welfare trap,” Sharma told NDTV in an interview. “Even in this election, nearly 3% of GDP has been announced in pre-poll welfare schemes,” he pointed out.
Sharma, who heads Rockefeller Capital Management’s international business, further said that Bihar’s economic progress has lagged far behind other states.
According to Sharma, excessive focus on welfare spending could limit Bihar’s ability to attract investments and develop infrastructure. “Bihar is the highest in spending so much money on welfare. India cannot be like China. When China was at a similar stage of its development, it was investing everything in infrastructure and nothing on welfare. It was ruthless capitalism,” Sharma explained to NDTV.
He added that while India has made efforts to rebalance public spending, welfare still dominates over long-term investments. “In India, the issue is that we are still investing a lot in welfare. Under the Narendra Modi government, he tried to shift a balance towards infrastructure and away from the welfare the UPA government was going down under,” he added.
Sharma also commented on the political competition that has turned welfare promises into a recurring electoral strategy. “One of the big swing factors in this 2025 election is the women-centric Rs 10,000 Jeevika Scheme of the NDA government. But now, Tejashwi Yadav is promising Rs 30,000 to counter that. It’s a vicious loop that states get stuck in,” he explained to NDTV.
Why global investors avoid investing in states with high welfare schemes?
Global investors often stay away from states that spend heavily on welfare schemes because they worry about how such spending affects financial stability and long-term growth.
When a state spends too much on welfare programs, its expenses rise faster than its income, creating revenue deficits. This forces the government to cut back on capital spending, money used to build roads, infrastructure, and industries that boost jobs and growth. As a result, the economy becomes less dynamic, and the state looks less appealing for long-term investment.
“Although allocating funds to social welfare schemes is crucial for socio-economic development, an increase in such allocations without a corresponding increase in revenue receipts can impact the credit profiles of the states in the long run, underscoring the importance of maintaining fiscal prudence,” says Crisil rating on its blog.
High welfare spending can also push states to raise taxes or borrow more money, both of which can discourage investors looking for stable and profitable opportunities.
Too much focus on welfare can crowd out important public investments and hurt the state’s credit ratings, lowering investor confidence. In addition, heavy welfare spending may reduce the number of people actively working, as some may become dependent on government support instead of seeking jobs, further slowing down productivity and economic growth.
Bihar’s pre-poll welfare spending
In the lead-up to the election schedule announcement, the Bihar government announced several welfare programs, including disbursing Rs.10,000 to 15 million women under the Mahila Rozgar Yojana.
According to Axis Bank Research, the state’s pre-poll welfare announcements up to the declaration of the poll schedule are valued at approximately Rs. 3,200 crore, or 2.9% of Bihar’s FY26 gross state domestic product (GSDP).
The report, led by Axis Bank’s Chief Economist Neelkanth Mishra, stated that this spending is in addition to the state’s 3% budgeted deficit. “But we don’t expect a breach of the 3 per cent of the GSDP target,” the research noted.
It added that the 2.9% of GSDP Bihar is spending on pre-poll welfare schemes is among the highest across all other states. This supports Sharma’s concerns about the growing welfare trap that may stop it from receiving global investments.
