Reserve Bank of India (RBI) has released the Report ‘State Finances: A Study of Budgets of 2025-26’. The theme of this year’s Report is ‘Demographic Transition in India - Implications for State Finances’. It provides a comprehensive assessment of the finances of State governments for 2025-26 against the backdrop of actual and revised/provisional accounts for 2023-24 and 2024-25, respectively.

The paper noted that states consolidated gross fiscal deficit increased to 3.3 per cent of gross domestic product (GDP) in 2024-25, after remaining below 3.0 per cent during the previous three years. The deficit exceeding 3 per cent mainly reflects 50-year interest free loans from the Centre under Special Assistance to States for Capital Investment, which is over and above the normal net borrowing ceiling of the States. In 2025-26, States have budgeted a gross fiscal deficit of 3.3 per cent of GDP.

The thrust on capital expenditure was sustained as capital expenditure remained steady at 2.7 per cent of GDP in 2023-24 and 2024-25 and is budgeted at 3.2 per cent of GDP in 2025-26. The consolidated outstanding liabilities of States remained elevated in the post-pandemic period with a budget estimate of 29.2 per cent of GDP at end-March 2026.

Indian States are at different stages of demographic transition, which increasingly shape their finances. Youthful States have a wider window of opportunity due to an expanding working-age population and stronger revenue mobilisation, which can be harnessed through higher investment in human capital. In contrast, ageing States face a narrowing window, with fiscal pressures arising from shrinking tax bases and rising committed expenditure, calling for higher revenue capacity and reforms in healthcare, pensions and workforce policies. Intermediate States need to balance growth priorities with early preparation for ageing.