New Delhi: India’s state governments are facing renewed fiscal pressures as deficits edge higher and demographic shifts begin to weigh on revenues and spending priorities, according to the Reserve Bank of India’s latest report on state finances.
In its report State Finances: A Study of Budgets of 2025-26, released on Thursday, the RBI said states’ consolidated gross fiscal deficit rose to 3.3% of GDP in 2024-25 after staying below 3% for three consecutive years. States have budgeted the same deficit level of 3.3% of GDP for 2025-26.
The central bank attributed the breach of the 3% mark largely to the Centre’s 50-year interest-free loans under the Special Assistance to States for Capital Investment scheme, which are over and above states’ normal borrowing limits.
Despite fiscal pressures, the RBI noted that the thrust on capital expenditure has been sustained. States’ capital outlay remained steady at 2.7% of GDP in 2023-24 and 2024-25 and is budgeted to rise to 3.2% of GDP in 2025-26, underlining a continued focus on growth-supportive spending.
However, the stock of debt remains a concern. Consolidated outstanding liabilities of states are estimated at 29.2% of GDP by end-March 2026, staying elevated in the post-pandemic period.
A key theme of this year’s report is India’s uneven demographic transition and its fiscal implications. The RBI said youthful states enjoy a longer window of opportunity, with expanding working-age populations supporting stronger revenue mobilisation, provided investments in education and skills are stepped up. In contrast, ageing states face a narrowing fiscal window, with shrinking tax bases and rising committed expenditure on healthcare and pensions, necessitating deeper reforms and higher revenue capacity.
States in the intermediate phase of demographic transition, the RBI added, will need to balance growth priorities while preparing early for ageing-related fiscal pressures.