Demographic shift

State finances reflect the rapid transition

- 

The Reserve Bank of India’s (RBI's) latest report on state finances, released last week, shows that the consolidated fiscal deficit of the states widened to 3.3 per cent of gross domestic product (GDP) in 2024-25 after three years of consolidation.

Factors responsible for this are slower revenue growth and higher capital expenditure. States have budgeted for the same level of fiscal deficit this financial year too. While the quality of expenditure has improved with the capital outlay rising and revenue expenditure compressed, this adjustment has relied on central support and borrowing. Revenue vulnerabilities persist due to the narrow concentration of the states’ own tax bases. It will also be worth watching how the reduction in rates of goods and services tax plays out. A variety of cyclical and structural factors drives state finances. One such factor with long-term implications is demographics. The RBI has done well to focus on this aspect.