Short Description
RBI’s latest report reveals India’s state fiscal deficits rising amid demographic shifts, impacting capital expenditure and long-term economic stability.
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3 minutes 15 seconds
Main Article
The Reserve Bank of India’s (RBI) annual “State Finances” report for 2025-26 paints a detailed picture of subnational fiscal health, framing it through the critical lens of demographic transition in India. The analysis, crucial for global investors and policymakers tracking emerging markets, shows a nuanced landscape where state finances are increasingly shaped by population dynamics. The consolidated gross fiscal deficit for Indian states rose to 3.3% of GDP in 2024-25, breaching the sub-3% trend of prior years. Notably, this increase is attributed largely to 50-year interest-free loans from the central government for capital investment, a policy measure outside normal borrowing limits. For the 2025-26 fiscal year, states have budgeted a deficit at the same elevated level, signaling continued strategic spending pressures.
Despite the rising deficit, a key positive highlighted is the sustained thrust on capital expenditure. States maintained capital spending at 2.7% of GDP in both 2023-24 and 2024-25, with an ambitious budget of 3.2% for 2025-26. This indicates a prioritization of long-term infrastructure and asset creation over current consumption, a prudent approach for fostering economic growth. However, this comes against the backdrop of elevated consolidated outstanding liabilities, projected at 29.2% of GDP by March 2026, underscoring lasting fiscal pressures from the pandemic era. Balancing this investment-driven growth with debt sustainability remains a central challenge.
The report’s core theme reveals how demographic dividends and ageing populations create divergent fiscal paths. Youthful states with expanding working-age populations have a window for stronger revenue mobilization and can leverage this through investments in human capital. In contrast, ageing states face narrowing fiscal space due to shrinking tax bases and rising costs for healthcare and pensions, necessitating urgent reforms. Intermediate states must juggle growth with preparing for future demographic shifts. This analysis is vital for understanding the heterogeneous risks and opportunities within India’s economic development, as state-level fiscal stability is foundational to the nation’s overall macroeconomic health.
Short Summary
The RBI’s 2025-26 report links India’s state finances directly to demographic trends, noting a rising fiscal deficit alongside sustained capital expenditure. It warns of divergent paths: youthful states can harness a demographic dividend, while ageing states face fiscal strain. This underscores the complex interplay between population dynamics and subnational economic stability.
