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State Fiscal Deficit Rises to 3.3% in 2024-25, RBI Flags Demographic Pressures

The Reserve Bank of India's annual study reports that the consolidated gross fiscal deficit of states increased to 3.3% of GDP in 2024-25, after staying below 3% for the previous three years. This rise is attributed to 50-year interest-free loans from the central government for capital investment. While states' outstanding liabilities have improved, declining to 28.1% of GDP, the RBI warns that demographic transitions are increasingly influencing state finances. The report categorizes states as youthful, intermediate, or ageing, with each facing distinct fiscal opportunities and pressures related to their population structure.

Key Points: State Fiscal Deficit Hits 3.3%: RBI Report on Demographics & Debt

  • Deficit rises to 3.3% of GDP
  • Driven by central interest-free loans
  • State liabilities decline to 28.1% of GDP
  • Demographic profiles shape fiscal futures
2 min read

States' fiscal deficit increases to 3.3% in 2024-25, after remaining below 3% three years: RBI report

RBI reports state fiscal deficit at 3.3% of GDP for 2024-25, with liabilities declining but demographic shifts posing future fiscal challenges.

"The youthful States have a wider window of opportunity... the window is getting narrower for the ageing States - RBI Report"

Mumbai, January 24

States' consolidated gross fiscal deficit increased to 3.3 per cent of gross domestic product in 2024-25, after remaining below 3.0 per cent during the previous three consecutive years, Reserve Bank's annual publication "State Finances: A Study of Budgets" noted.

The deficit of States exceeding 3 per cent mainly reflects 50-year interest-free loans from the Centre under the Special Assistance to States for Capital Investment, which is over and above the States' normal net borrowing ceiling.

For 2025-26, States have budgeted gross fiscal deficit at 3.3 per cent of GDP while improving the composition of spending by restraining revenue expenditure.

The RBI report noted that the consolidated outstanding liabilities of States declined to 28.1 per cent of GDP at end-March 2024, from a peak of 31 per cent at end-March 2021. The improvement reflects both fiscal consolidation efforts and favourable debt dynamics, the central bank said in the report published this week.

The outstanding liabilities are budgeted to increase to 29.2 per cent of GDP by end-March 2026.

"Notwithstanding elevated debt levels, indicators of debt sustainability remain favourable," RBI asserted. The RBI report further noted that states in India are at different stages of demographic transition and their demographic profiles are increasingly influencing their finances.

"The youthful States have a wider window of opportunity, benefiting from expanding working age population and stronger revenue mobilisation. In contrast, the window is getting narrower for the ageing States, facing fiscal pressure arising out of shrinking tax bases and rising obligations from committed expenditure," the RBI report noted.

Going forward, RBI noted that youthful States may harness their demographic dividend by strengthening human capital investment, intermediate States may balance growth priorities with early preparation for ageing, and ageing States may enhance revenue capacity alongside healthcare, pension and workforce policy reforms. The Reserve Bank's annual publication

"State Finances: A Study of Budgets" provides a comprehensive analysis of the fiscal position of State governments in India for the period 2023-24 (actuals) to 2025-26 (budget estimates). The theme of this year's Report was 'Demographic Transition in India - Implications for State Finances'.

- ANI

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Reader Comments

P
Priya S
The demographic angle is very insightful! States like Bihar and UP need to invest heavily in education and skill development NOW to harness their youth bulge. Otherwise, this 'dividend' can quickly turn into a liability. Hope state governments are paying attention to this RBI warning.
A
Arjun K
Good to see the overall liabilities have come down from 31% to 28.1%. That shows some fiscal prudence. The increase to 3.3% deficit seems manageable if it's truly for capital expenditure like roads, power, and irrigation. As long as it's for assets, not freebies, it's okay. 👍
S
Sarah B
The challenge for ageing states like Kerala and Tamil Nadu is real. Rising pension and healthcare costs with a shrinking tax base is a tough combo. They need innovative revenue models and maybe more central support. This report should be mandatory reading for all finance ministers!
V
Vikram M
Restraining revenue expenditure is easier said than done. Salaries, pensions, and subsidies form a huge part of state budgets. Without tough political decisions, this target of 3.3% for next year will be missed. Hope they have a concrete plan.
K
Kavya N
Interesting analysis by RBI. It's not a one-size-fits-all problem. Each state has a different challenge based on its population. The central government's role in coordinating and supporting this transition will be crucial. Jai Hind! 🇮🇳

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