State Finances Under Strain: Fiscal Deficit Climbs Above 3% as RBI Flags Widening Demographic Pressures
India’s state governments saw a deterioration in their fiscal position in 2024–25, with the consolidated gross fiscal deficit rising to 3.3 per cent of GDP after staying below 3 per cent for three consecutive years, according to the Reserve Bank of India’s annual report State Finances: A Study of Budgets.
The RBI noted that the breach of the 3 per cent threshold largely reflects additional borrowing enabled by the Centre’s Special Assistance to States for Capital Investment. These 50-year interest-free loans are over and above the normal net borrowing ceiling allowed to states. For 2025–26, states have again budgeted a consolidated gross fiscal deficit of 3.3 per cent of GDP, while aiming to improve the quality of spending by curbing revenue expenditure.
The report highlighted an improvement in states’ debt position, with consolidated outstanding liabilities declining to 28.1 per cent of GDP at end-March 2024 from a peak of 31 per cent in March 2021. This improvement was attributed to fiscal consolidation efforts and favourable debt dynamics. However, outstanding liabilities are projected to rise again to 29.2 per cent of GDP by end-March 2026. Despite this, the RBI said indicators of debt sustainability remain favourable.
A key theme of the report is the growing impact of demographic trends on state finances. Youthful states benefit from expanding working-age populations and stronger revenue mobilisation, while ageing states face fiscal pressure from shrinking tax bases and rising committed expenditure. The RBI suggested that youthful states should focus on human capital investment, intermediate states should prepare early for ageing, and ageing states must enhance revenue capacity while reforming healthcare, pension, and workforce policies.
The report analyses state finances from 2023–24 actuals to 2025–26 budget estimates, with this year’s theme centred on Demographic Transition in India and its Implications for State Finances.
(This article has been syndicated from ANI)
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