States’ fiscal deficit rises to 3.3% of GDP in FY 2024-25; RBI explains the factor

States’ consolidated gross fiscal deficit rose to 3.3% of gross domestic product (GDP) in 2024-25 after remaining below the 3% mark for three consecutive years, according to a report released by the Reserve Bank of India (RBI) on Friday.

In its report ‘State Finances: A Study of Budgets of 2025-26’, the RBI said the breach of the 3% threshold mainly reflected the impact of 50-year interest-free loans provided by the Centre under the Special Assistance to States for Capital Investment scheme, which are over and above states’ normal net borrowing limits.

For 2025-26, state governments have budgeted a gross fiscal deficit of 3.3% of GDP, the report noted.

The report, prepared by RBI's Division of State Finances in the Department of Economic and Policy Research, said states continued to prioritise capital expenditure, with spending holding steady at 2.7% of GDP in both 2023-24 and 2024-25, and projected to rise to 3.2% of GDP in 2025-26.

However, the consolidated outstanding liabilities of states have remained elevated in the post-pandemic period and are estimated at 29.2% of GDP by end-March 2026, it added.

The theme of this year’s report is ‘Demographic Transition in India – Implications for State Finances’.

It highlighted that Indian states are at different stages of demographic transition, which is increasingly shaping their fiscal positions.

According to the RBI, states with a younger population have a wider opportunity window due to an expanding working-age population and stronger revenue mobilisation potential, which can be leveraged through higher investment in human capital.

"In contrast, ageing States face a narrowing window, with fiscal pressures arising from shrinking tax bases and rising committed expenditure, calling for higher revenue capacity and reforms in healthcare, pensions and workforce policies," the report said.

States at an intermediate stage of demographic transition need to balance growth priorities while preparing early for ageing-related fiscal challenges, it added.