The Budget cannot ignore demography: Labour-intensive growth is key

Much of the public discussion about the forthcoming Union Budget has focused on growth, tax policy, job creation, and fiscal consolidation. Yet beneath these themes lies a common force shaping India’s economic future: The nation’s demography.  

The Budget, whether explicitly acknowledged or not, is as much a demographic document as it is a fiscal one: Public expenditure and tax policies on health, nutrition, education, housing, employment programmes, and urban infrastructure need to be calibrated to assumptions about population size, births, and the future labour force.  

India is the world’s most populous country, with an estimated population of around 1.42 billion in 2025. It adds more than 25 million people every year through births alone — more than the entire population of countries such as the Netherlands, Greece, Sweden, and New Zealand. These aggregate figures, however, mask sharp regional divergences that have direct fiscal implications. 

A majority of Indian states have achieved total fertility rates (TFRs) well below the population-replacement level of 2.1 children per woman, according to the National Family Health Survey-5. The replacement fertility level indicates that the population size will stop growing after some time and will only replace itself. When fertility falls below that level, the population will begin to decline in absolute numbers.   

Kerala was the first Indian state to reach replacement fertility in 1988, when the national TFR was still 4, according to the Data for India portal. Tamil Nadu achieved it in 1993 while West Bengal, despite being one of India’s poorest states, reached replacement fertility in 2005.  

Four states — Chhattisgarh, Uttar Pradesh, Madhya Pradesh and Bihar — are yet to reach replacement-level fertility according to official data. Uttar Pradesh, however, was expected to cross this threshold last year. Madhya Pradesh is projected to do so in the next two to three years, while Bihar is likely to attain replacement levels the last, not until 2039. 

Even if fertility rates in these states converge to southern levels, absolute births will remain substantially higher due to sheer demographic momentum, a phenomenon resulting from a large number of young adults in childbearing years. Uttar Pradesh and Bihar together account for more than a quarter of India’s population, with a median age in their late twenties, according to estimates based on the 2011 census.  In 2023, 31 per cent of the 25.2 million total births in India occurred in only Bihar and Uttar Pradesh. 

The budgetary implications are immediate. States with high absolute birth rates face sustained pressure on maternal and child health services, schools, skill development systems, and labour markets. In contrast, low-fertility states confront a different challenge: Slower growth of the working-age population, rising ageing ratios, and potential labour shortages. Yet India’s fiscal architecture largely treats these distinct demographic realities through uniform policy instruments. 

Nowhere is this tension more visible than in debates over centre-to-state fiscal transfers. Population size remains a key criterion in Finance Commission devolution formulas, reflecting legitimate concerns about expenditure needs. However, states that have successfully reduced fertility and invested in human development increasingly argue that such formulas penalise demographic performance while rewarding sheer population growth.  

This debate cannot be resolved by abandoning the population criteria altogether, but it does underscore the need to complement headcounts with outcome-based measures of human capital such as child health, learning outcomes, and female labour force participation. 

The employment dimension is particularly critical. High-fertility states will continue to add large cohorts to the working-age population over the next two decades. With low local job opportunities, this becomes a source of economic stress. Labour force participation, especially among women in the northern states remains low. A Budget that does not explicitly link demographic trends to regional labour-intensive growth strategies risks missing the core challenge. 

Workers from high-fertility, low-income states increasingly migrate to low-fertility, higher-income states and cities. Yet migration remains largely invisible in Budget design. Destination states bear the fiscal costs of housing, transport, health, and urban services for migrant populations, while social protection remains weakly portable.  

Treating migration as a fiscal and planning issue rather than merely a labour-market outcome would be a significant step forward. For example, affordable family housing in urban areas is in short supply, costly, and remains largely inaccessible to migrants.  

What would a demographically informed Budget look like? First, it would explicitly acknowledge regional demographic divergence. Second, it would prioritise human capital investment, particularly in early childhood, education quality, and women’s employment in high-birth regions. Third, it would support productivity, elder care, and labour force participation in low-fertility states facing demographic aging. Finally, it would recognise migration as a structural feature of India’s development trajectory and allocate resources accordingly. 

Take the example of Central maternal health schemes. Should maternal and welfare incentives be differentiated by regional demography, encouraging delayed childbearing, birth spacing, and continuing higher incentives for permanent sterilisation in high-fertility states, while avoiding stronger incentives for permanent methods in low-fertility states? Would such a calibration better align public spending with demographic realities without compromising reproductive choice? At the same time, welfare design must explicitly recognise migration by ensuring portability of health and nutrition incentives between home and destination states.  

India’s fertility transition is no longer a distant concern; it is already reshaping the geography of growth, employment, and fiscal pressure. The central question for the Union Budget is not how many people India has, but where they are born, where they will work, and whether public policy is aligned with that demographic reality. Ignoring these shifts would be a costly policy mistake.

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The author is Union Bank chair professor of economics, director (research and FPM), Great Lakes Institute of Management, Chennai