Widening Fiscal Deficits: The Economic Puzzle Facing India's States

India's states face increasing fiscal deficits, widening to 3.3% of GDP in FY25, attributed to higher borrowing through a central government scheme. The Reserve Bank of India notes disparities in state demographics, affecting revenue mobilization and expenditure needs, urging reforms in revenue capacity, healthcare, pensions, and workforce policies.

India's states are experiencing a significant fiscal challenge, as the aggregate fiscal deficit has escalated to 3.3% of GDP in FY25, up from a static 3% over the previous three years, according to the Reserve Bank of India (RBI).

The RBI's analysis of state budgets reveals that this widening deficit is largely due to increased borrowing facilitated by the central government's 'Special Assistance to States for Capital Investment' program, offering 50-year interest-free loans.

The RBI report highlights the varying impact of demographics on state finances, emphasizing opportunities in youthful states with expanding workforces, and challenges in ageing states with shrinking tax bases, prompting calls for reforms in revenue management, healthcare, and pension systems.