Demographic gaps: Why different states need different budget allocations as they age

Subscribe to enjoy similar stories. For anyone interested in fiscal federalism, the Reserve Bank of India’s (RBI) annual study of state finances is a treasure trove of information. This year’s study, analysing state budgets of 2025-26, is no exception.

First, the good news. The fiscal health of state governments is improving. True, their consolidated gross fiscal deficit rose to 3.3% of India’s GDP in 2024-25, after staying below 3% during the previous three years.

But this increase is mainly due to 50-year interest-free loans from the Centre under its special assistance scheme for capital investment. At the same time, the total outstanding liabilities of states declined from a peak of 31% of GDP at the end of 2020-21 to 28.1% at the end of 2023-24. The theme of this year’s study, ‘Demographic Transition in India—Implications for State Finances,’ points out that Indian states are at different stages of a demographic transition.

Inevitably, this has consequences for their finances and policies. Their old-age dependency ratio, or the elderly count as a proportion of their working-age population, varies from 14% in Bihar to 30% in Kerala. Fiscal deficits as a proportion of gross state domestic product (GSDP) also vary widely—from Arunachal’s little over 8% to Gujarat’s little less than 3%.

This variation necessitates differential fiscal policy approaches, as suited to their respective age structures. It also poses entirely different fiscal challenges. Youthful states have a wider window of opportunity, thanks to an expanding working-age population and stronger revenue mobilization—but only if they adopt a favourable policy environment, one that emphasizes quality education, skill training, healthcare facilities and job