States' gross fiscal deficit topped 3% in FY25 after 3 years: RBI report

States' fiscal deficit crosses 3% of GDP in FY24 after 3 years; capital spending rises as liabilities remain manageable, says RBI report

States’ consolidated gross fiscal deficit increased to 3.3 per cent of gross domestic product (GDP) in 2024-25, after remaining below 3 per cent during the previous three financial years, the Reserve Bank of India (RBI) said in a report titled ‘State Finances: A Study of Budgets of 2025-26’.

 

For 2025-26, states have budgeted a gross fiscal deficit at 3.3 per cent of GDP while improving composition of spending by restraining revenue expenditure.

 

“The deficit exceeding 3 per cent mainly reflects 50-year interest-free loans from the Centre under special assistance to states for capital investment. This is over and above the normal net borrowing ceiling of states. In 2025-26, states have budgeted a gross fiscal deficit of 3.3 per cent of GDP,” the report said.

 

 

The thrust on capital expenditure (capex) was sustained as capex remained steady at 2.7 per cent of GDP in 2023-24 and 2024-25. It is budgeted at 3.2 per cent of GDP in 2025-26.

 

Consolidated outstanding liabilities of states declined to 28.1 per cent of GDP at end of March 2024, from a peak of 31 per cent in March 2021.

 

“The improvement reflects both fiscal consolidation efforts, and favourable debt dynamics. The outstanding liabilities are budgeted to increase to 29.2 per cent of GDP by end-March 2026,” it said.

 

Notwithstanding elevated debt levels, indicators of debt sustainability remain favourable, it noted.

 

The report observed that states are at different stages of demographic transition, which increasingly shape their finances.

 

“Youthful states have a wider window of opportunity due to an expanding working-age population and stronger revenue mobilisation. This can be harnessed through higher investment in human capital,” it said.

 

In contrast, ageing states face a narrowing window, with fiscal pressures arising from shrinking tax bases and rising committed expenditure. This calls for higher revenue capacity and reforms in healthcare, pension and workforce policies. Intermediate states need to balance growth priorities with early preparation for ageing, the report added.