Too bad I'm not smart enough to get the Img feature to work. Interesting to ask a composite video SDTV question in the land of RGB.
I can't find the 'tvout-tweaks_sharp.glsl' source online but it seems to be a combination of the 'tvout-tweaks' and 'sharp-bilinear' shaders. Some talk whether it's better to apply the bilinear sharpening in the linear RGB color space where it's more accurate or the gamma (composite) video space where some colors get interpolated more with gamma being non-linear but where pixel wobble is guaranteed to be removed.
The rainbow artifacts (sorry US spelling) definitely existed in composite video and still do if you hook up to LCD or CRT. Just hard to perceive from a distance and we all got so used to it that it felt natural. I definitely notice it now switching from RGB on PVM to composite. You're right that it happens in areas of high contrast, especially where dithering was used and this composite blur would conveniently replace the dithering with a transparency effect. Rainbowing (is that name?) is the tradeoff.
I took these screenshots from capture card in OBS that is straight from the video signal and not processed by a television or filter:
https://i.postimg.cc/8CnBg56q/OBS-C-to-S.png
If you zoom in, you can see rainbowing in top left composite image on every letter but the L and E for obviously being the least distorted ones. Little to none in S-Video due to the separation of luma and chroma on different wires straight from the video chip that drastically reduces interference between the two.
But sure, rainbowing in your image was never that bad IRL. Let's think about where your composite video comes from. Open to corrections. Video encoder from $40 computer creates digital RGB image via emulator instruction that gets digitally processed by tvout-tweaks function to become artificially generated composite. Code commentary states no crosstalk between luma and chroma is simulated. Does clamp the 0-255 color values of RGB to 16-255 for more accurate CRT representation, apparently meaning colors cannot be as dark. Converts RGB to luma and chroma color space but is not an exact process since RGB has many more colors available and the digital to analog process itself adds noise to the signal. I guess conversion to S-Video would use identical code.
Does use real composite video fact of being on a single wire and signal travels to 3.5mm audio out jack where it may get hit with EMI from chips and capacitors along the way and take a small impedance mismatch from this part of the PCB not being 75 ohms when it hits the 75 ohm cable. Cross talk between video and audio on the cable due to being so close together versus on 3 separate cables from actual console. CRT then processes signal.
To answer the subject question, consoles didn't add blurring to the video output. Was blurry enough as is. The artificially created blurring in the image on the right is horizontal and vertical. A bilinear filter uses linear interpolation on x and y axis so is actually quadratic. Forms a square of 4 known values and calculates what the middle value should be from these 4. I still see some rainbowing but it's greatly reduced. I could imagine interpolating dulls the colors since the new value of every pixel is an average of other pixels, yet this process sharpens the image overall.