States’ consolidated fiscal deficit widens 0.3 pc to 3.3 per cent in FY25: RBI

The central bank said it analysed the budgets presented by all the states for the fiscal year, and attributed the widening of the key number to higher borrowing by states under the central government’s 50-year interest-free loans in the ‘Special Assistance to States for Capital Investment’.Accessing money under the central government scheme is over and above the normal net borrowing ceiling of the states, the RBI noted.

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, it said.

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 March-end 2026, the RBI said in its study of state finances.

The report also found some influence of demographics, and particularly the age of the population, on state finances, noting that Indian states are at different stages of demographic transition.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, while the ageing states face a narrowing window.In the case of ageing states, there are fiscal pressures arising from shrinking tax bases and rising committed expenditure, which call for higher revenue capacity and reforms in healthcare, pensions and workforce policies, the RBI said.

The intermediate states need to balance growth priorities with early preparation for ageing, it said.