States’ gross fiscal deficit hits 3.3% of GDP in 2024‑25, RBI flags demographic impact

The Reserve Bank's annual publication "State Finances: A Study of Budgets" reported that the consolidated gross fiscal deficit of states reached 3.3 per cent of gross domestic product (GDP) in 2024-25 after it remained below 3.0 per cent during the previous three consecutive years.

The States' deficit above 3 per cent stems from 50-year interest-free loans which the Centre provides under the Special Assistance to States for Capital Investment program that exceeds the States' permitted net borrowing limit.

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States expect to achieve a gross fiscal deficit of 3.3 per cent of GDP in 2025-26, while they enhance their spending structure by reducing their revenue expenses.

States’ debt burden declines on fiscal consolidation

The RBI report showed that States' consolidated outstanding liabilities decreased to 28.1 per cent of GDP at the end of March 2024 from a high of 31 percent which occurred at the end of March 2021. The report by the central bank published this week shows that the improvement stems from fiscal consolidation initiatives and beneficial debt management factors.

Outstanding liabilities seen rising by FY26

The report indicates that outstanding liabilities will rise to 29.2 per cent of GDP by the end of March 2026.

RBI flags favourable debt sustainability indicators

"Notwithstanding elevated debt levels, indicators of debt sustainability remain favourable," RBI said. The RBI report explained that Indian states reached various demographic transition phases, which now shape their financial situations through their current demographic patterns.

Demographic transition increasingly shaping state finances

"The youthful States have a wider window of opportunity, benefiting from an 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 report noted.

RBI outlines roadmap for youthful, intermediate and ageing states

The Reserve Bank of India explained that young states will benefit from demographic growth when they invest in human capital development, while intermediate states will achieve their growth goals through early planning for their upcoming elderly population.

About the RBI’s ‘State Finances’ report

The research study 'State Finances: A Study of Budgets' examines the financial condition of Indian state governments from the actual fiscal year 2023-24 to the budget projections of 2025-26. The theme of this year's Report was 'Demographic Transition in India - Implications for State Finances'.

With ANI inputs