India’s demographic transition is increasingly influencing the State government finances. While a favourable age profile supports demographic dividend at the national level, the interstate difference in age structure has altered the window of opportunity for the States. The youthful States have a wider window of opportunity benefiting from expanding working age population and stronger revenue mobilisation. In contrast, the window is getting narrower for the ageing States facing fiscal pressure arising out of shrinking tax bases and rising obligations from committed expenditure. The differential fiscal pressure arising out of divergent age structure of States calls for forward-looking policies incorporating population dynamics and the related fiscal challenges. Going forward, youthful States may harness their demographic dividend by strengthening human capital investments, intermediate States may balance growth priorities with early preparation for ageing, and ageing States may enhance revenue capacity alongside healthcare, pension and workforce policy reforms.

1. Introduction

3.1 India’s demographic landscape is undergoing a profound shift, reflecting changes in population size, age structure, and age dependencies over time. The demographic transition characterised by declining fertility, rising median age, higher life expectancy and falling dependency, has opened up a ‘window of opportunity’ to move into a higher growth trajectory supported by demographic dividend. The all-India picture, however, hides the large interstate divergence in age structure. While some States with their young age structure are currently enjoying the ‘window of opportunity’, there are States with a relatively matured age structure for whom the ‘window of opportunity’ is gradually closing as they have crossed or move closer towards their ‘demographic turning point’. This uneven demographic transition across States necessitates a balanced public policy approach that leverages the economic potential of a youthful workforce while addressing the health and social needs of an ageing population.

3.2 Against this backdrop, this chapter aims to address the following research questions: How uneven is the demographic transition across Indian States? How prepared are the States to handle their current and future demographic challenges? and How do demographic dynamics affect medium-term fiscal sustainability? The chapter is organized as follows. Section 2 analyses demographic transition in India at the national level. Section 3 presents a demographic profile of the Indian States highlighting the unevenness in their age structure. Section 4 analyses the fiscal implications of demographic changes in terms of their impact on State government revenue, expenditure and debt sustainability. Section 5 suggests policy options for States at different stages of demographic transition. Section 6 concludes.

2. Demographic Transition in India

3.3 India is currently the most populous country in the world having surpassed China in 2023. As of mid-2025, its population is estimated at 1.46 billion, a figure expected to reach 1.5 billion by 2036, peak around 1.7 billion in the early 2060s and then begin a gradual decline, though remaining the most populous country throughout the century (UN, 2024). Further, median age of the Indian population was just around 28 years in 2022 as compared to above 40 years in developed countries such as the US, Europe, and South Korea¹, making it one of the ‘youngest large nations’ in the world. The share of the workingage (15-64 years) population in India which was estimated at 64 per cent in 2021 (UNFPA, 2022), is projected to peak around 65.1 per cent in 2031, before stabilising by 2036 (Chart III.1a). The high share of working age population provides a window of opportunity towards faster economic growth by reaping the benefits of a demographic dividend². The demographic dividend can, in turn, enhance aggregate labour supply, productivity, consumption, and savings, fostering economic growth if supported by enabling policies (Bloom et al., 2003).

3.4 The demographic transition in India is being shaped by two major factors - falling fertility rate and increasing life expectancy. India’s total fertility rate (TFR) has fallen from 5.9 children per woman in 1950 to 2.0 children per woman in 2021. Further, the country witnessed a significant rise in average life expectancy at birth from just 37 years in the post-independence period to 70 years in 2020 which is projected to reach 81 years by the end of this century (UN, 2019). Consistent with this shift, dependency ratios are also undergoing changes. With lower fertility and higher life expectancy, the youth dependency ratio³ is expected to fall steadily during 2011 to 2036, while the oldage dependency ratio⁴ (OADR) would almost double during the same period. As a result, the total dependency ratio, though declining initially, is expected to bottom out by 2031, reflecting the offsetting effects of fewer children and more elderly dependents (Chart III.1b).

3.5 The narrowing gap between youth and old-age dependency ratios captures two critical demographic realities. First, India possesses a short-lived window over the next decade to capitalise on its demographic dividend, as the working-age cohort attains its apex, and the total dependency ratio remains favourable. From 2036 onwards, the share of working age population is expected to decline, whereas the total age dependency ratio is expected to rise, gradually closing the window of opportunity. Second, the nation must concurrently take on board the accelerated onset of population ageing and prepare itself to grapple with the diverse fiscal policy challenges which most of the advanced economies of the world are facing today.

3. Demographic Profile of Indian States

3.6 The time and pace of demographic transition vary significantly across the Indian States due to differences in the total fertility rate as well as the life expectancy at birth. The total fertility rate at all India level declined from 2.4 during 2011-13 to 2.0 during 2021-23. While the total fertility rates of all the States have declined during this period, the dip has been particularly sharp for Delhi, Gujarat, Jharkhand, and Jammu & Kashmir (Table III.1). Currently, the total fertility rates of only seven States – Bihar, Uttar Pradesh, Madhya Pradesh, Rajasthan, Chhattisgarh, Jharkhand, and Assam are at or above the replacement rate of 2.1⁵.

3.7 Total fertility rate of all other States has fallen below the replacement rate. Similarly, there are interstate differences in life expectancy. The average life expectancy at all India level is 70 years. However, life expectancy at the State level ranges from around 65 years in Chhattisgarh to around 76 years in Delhi. Generally, States, which have a lower fertility rate, also have higher life expectancy, resulting in higher share of elderly population than the national average (MoHFW, 2020).

3.8 To assess the demographic profile of Indian States, a modified version of the standard International Labour Organisation (2023) classification has been adopted⁶. In this approach, a State is classified as ageing if the share of population aged 60 years and above is 15 per cent or more, intermediate if it is 10 per cent to below 15 per cent, and youthful if it is below 10 per cent. Data from the Report of the Technical Group on Population Projections, 2020, published by the Ministry of Health and Family Welfare, Government of India, has been used to classify the States under these three categories⁷. In 2016, all the Indian States remained in the youthful or intermediate category (Table III.2). By 2026, Kerala and Tamil Nadu are expected to enter the ageing category, with more than 15 per cent of their population above 60 years of age. Most of the remaining States will be in the intermediate category and a few States under the youthful category during this period. By 2036, however, more than half of the States will be ageing and the rest will fall under the intermediate category with no States remaining in the youthful category.

3.9 India’s gradual shift from a predominantly youth-heavy population towards a more mature age structure is depicted in Chart III.2. In the early and mid-transition stages, falling fertility reduces younger cohorts and increases the share of the working-age population, generating a demographic dividend that can accelerate growth (Bloom, Canning and Sevilla, 2003; Lee and Mason, 2006). The dividend can boost per capita income and is often reinforced by higher investment in health and education, rising female labour force participation, and greater savings. With supportive policies in education, healthcare, gender equality, job creation, and governance, these benefits can be maximised. However, as the transition advances, population ageing becomes the dominant outcome, placing unprecedented demands on public resources while shrinking the working-age tax base that sustains them.

3.10 A country’s demographic dividend peaks when its working-age population is at its highest. Several studies highlight that a country’s demographic dividend peaks when the share of working age population is approximately twothirds of the total population (UN, 2023). The share of working age population in India is projected to rise from 64.8 per cent in 2026 to 65.1 per cent in 2031 and then decline to 64.9 per cent by 2036 (Table III.3). India may, however, continue to enjoy demographic dividend for a longer period than other countries due to significant regional heterogeneity in the process of demographic transition (Jain and Goli, 2021).

3.11 Depending on the age structure, the effective demographic windows of opportunity – when the maximum demographic dividend can be reaped – will vary across the States. For instance, by 2026, States like Kerala and Tamil Nadu will already be ageing, with falling share of working age population, resulting in narrowing of the window of opportunity. In contrast, there are several States with younger population like Bihar, Madhya Pradesh, Uttar Pradesh, Chhattisgarh, Jharkhand and Haryana, where the share of working age population will continue to rise beyond 2031, widening the window of opportunity for a longer period. These States will also serve as the principal source of labour supply to the national economy. In these youthful States, however, reaping demographic dividend will not be automatic but conditional on supportive socio-economic policy environment in terms of investment in human capital and decent employment opportunities. For the intermediate States, the window of opportunity will be narrower than the youthful States, with almost half of the intermediate States of 2026 entering the ageing category by 2031 and the remaining ones by 2036. The share of working age population in some of these States will start moderating from 2026 and for others from 2031. However, the “demographic turning point” - the year when the share of the working-age population in their total population begins to decline - will differ across States even within this group.

3.12 By 2036, more than half of the States are projected to transition into the ageing category, with Kerala at the forefront, with more than 22 per cent of its population as elderly, an indication of advanced ageing. In these regions, the demographic dividend is likely to close earlier than the national average, primarily on account of rapid and sustained decline in fertility levels (UNFPA, 2019). For these States, policy imperatives would gradually shift from employment generation towards old-age support systems.

4. Fiscal Implications of Demographic Changes

3.13 Public finances are highly sensitive to demographic changes. Changes in the population age structure can have a significant effect on fiscal sustainability since they can affect both government revenues and expenditures.

4.1 Impact on Revenue

3.14 Population age structure has profound implications for government revenue. In the youthful States, a larger workforce, if employed effectively, can create a larger tax base, boosting both direct and indirect tax receipts. Increased urbanisation can further boost tax receipt in these States by shifting away from hard-to-tax sectors like agriculture. In contrast, in the ageing States, a gradually shrinking labour force will lower the long-term growth rate and thus partly erode the tax base, particularly, for personal income taxes (Crowe et al., 2022; Kim et al., 2014). Different revenue indicators constructed as simple averages of States belonging to each demographic cohort viz. youthful, intermediate, and ageing, provide insightful outcomes (Tables III.4 and III.5).

3.15 The youthful States consistently display stronger revenue mobilisation, reflected in higher levels of revenue receipts, tax revenues and central transfers (Table III.5). Intermediate States maintain a relatively stable revenue performance, with moderate outcomes across revenue receipts, tax revenues, and central transfers, suggesting steady but less dynamic fiscal capacity. Ageing States exhibit weaker performance, with lower revenue receipts compared to the other two groups on account of lower tax collections as well as lower transfers from the Centre reflecting structural challenges linked to higher demographic pressures and slower growth (Table III.5).

4.2 Impact on Expenditure

3.16 Demographic transitions alter established patterns of public outlays and compel governments to recalibrate priorities (Baldacci, 1997). Public expenditure, inherently dynamic, is shaped by demographic, economic, and political undercurrents that define a society’s trajectory. With Indian States traversing distinct stages of demographic transition, any straitjacket expenditure rule will be rendered untenable. Expenditure priorities must adapt to the demographic contours of each State and the pace at which they unfold. Youthful States are expected to emphasise education and skilling to harness their demographic dividend (Jain et al., 2025). In contrast, ageing States will require greater public spending on healthcare, pensions, and social security (Bloom, Canning & Fink, 2010). Most studies have found that population ageing leads to an increase in health expenditure of the government (Kim et al., 2014; Matteo, 2005).

3.17 An analysis of the social sector expenditure of States across four benchmark years - 2010-11, 2015-16, 2020-21, and 2024-25 yields interesting results. Here, social sector expenditure includes spending under five broad heads - education, health, urban development, social security and welfare, and pension (Table III.6). All aggregates are standardised across States and presented both as ratios to GDP as well as shares in total social sector expenditure.

3.18 At the aggregate level for all States, spending patterns have undergone a structural pivot towards infrastructure and social protection. State governments’ spending on social security and labour welfare has expanded visibly from 0.6 per cent of GDP in 2010-11 to 1.1 per cent of GDP in 2024-25 (Chart III.3a). Urban development expenditure has also moved upwards, climbing from 0.7 per cent to 1.2 per cent over the same period. Health outlay as per cent of GDP has risen since the pandemic, while education has remained largely flat throughout. Pension, too, has remained broadly stable, barring the pandemic related spike that has since unwound.

3.19 As a share of total social sector spending, expenditure on social security has risen from 9.5 per cent in 2010-11 to 14.3 per cent in 2024-25, largely driven by the expansion of direct benefit transfers that cut across demographic groups (Chart III.3b). The share of urban development has inched up from 12.2 per cent to 15.6 per cent, reflecting the need to cater to the expanding city population. In contrast, the share of education, has steadily receded, from 41.5 per cent in 2010- 11 to 32.9 per cent in 2024-25. The sharp decline in the share of education, despite a growing need to invest in human capital, suggests emerging trade-offs in expenditure prioritisation. This trend underscores the need for safeguarding long term growth enablers such as education and health from being crowded out by immediate consumptionbased commitments.

Youthful States

3.20 Demographic groupwise analysis reveals that in the youthful States, education dominates the social sector expenditure followed by expenditure on pension, urbanisation, health and social security. In 2024-25, the youthful States on average devoted a higher share of social sector expenditure (35 per cent) to education compared to the other two groups, underscoring their commitment towards skilling, and building capacities (Charts III.4; III.6; and III.7). Bihar recorded the highest education share (41.8 per cent) among all States, followed by Maharashtra, Rajasthan, and Chhattisgarh in close succession.

However, even within the youthful cohort, the share of education in total social sector spending has moderated from the 2015-16 levels, signalling a gradual shift in fiscal priorities as social and infrastructural needs have expanded. Accordingly, there has been an increase in the share of urbanisation, and social security between 2015-16 and 2024-25, whereas the share of pension and health remained broadly stable (Chart III.4). Among States, Chhattisgarh, Uttar Pradesh, Gujarat, and Telangana recorded the highest allocation towards urban development, as expanding population heightens demand for housing, transport, and civic infrastructure. Health spending as per cent of total social sector spending remained flat between 2015-16 and 2024-25, reflecting States’ continued focus towards maternal and childcare, which is critical to help realise the demographic dividend in youthful States.

3.21 The youthful States have scaled up their capital spending and improved the quality of expenditure. The revenue expenditure to capital outlay (RECO) ratio has declined from 6.2 in 2015-16 to 5.0 in 2024-25, reflecting their focus on infrastructure and capacity building (Chart III.5a). Their lower committed expenditure⁸ compared to the other two groups has generated greater fiscal headroom to prioritise demographically sensitive areas such as education, skilling, health, and infrastructure (Chart III.5b). As these States broaden social support programme, calibrated spending and careful targeting will be essential to ensure that expanding social commitments do not crowd out critical developmental spending.

Intermediate States

3.22 Broadly similar expenditure pattern was noted for the intermediate States in 2024-25 with education having the dominant share in social sector expenditure followed by pension, urbanisation, health, and social security. Intertemporally, there is a sharp decline in the expenditure shares of education and pension between 2015-16 and 2024-25, whereas the shares of urbanisation, social security and health have increased considerably (Chart III.6). For urban development, the youthful and intermediate cohorts allocate a higher share (around 16 per cent), compared to the ageing States (7 per cent), consistent with their relatively younger age profile.

3.23 Intermediate States have maintained a balanced expenditure profile, with gradual improvement in quality of spending over time (Chart III.5). The RECO ratio has edged down from 8.0 in 2015-16 to 6.5 in 2024-25, reflecting gains in fiscal space to support developmental priorities. Their committed expenditure has also softened from the pandemic peak and dipped slightly below the 2015-16 levels, indicating measured containment of routine obligations.

Ageing States

3.24 In the ageing States, education and pension accounted for almost equal share of social sector expenditure, followed by social security in 2024- 25. The expenditure share of health was marginally lower than the youthful and intermediate States, whereas the share of urbanisation was less than half of those States (Chart III.7). The considerably lower share of urbanisation in the ageing States compared to the other two age groups reflects their earlier urban transitions and already mature city systems. Similarly, their lower share of education compared to youthful and intermediate States reflects the impact of population ageing.

3.25 The ageing States on average allocate close to 30 per cent of their total social sector spending to pensions - the highest among the three cohorts (Chart III.7). Pension burdens have increased in tandem with the rising share of elderly population in these States. Intermediate States and youthful States spend less for now, but as ageing pressures become ubiquitous, rising life expectancy and expanding coverage mean pension liabilities could escalate rapidly in the years ahead.

3.26 Underscoring the growing fiscal pressure of welfare commitment amid demographic change, the share of social security and welfare - which encompasses expenditure on women, children, the elderly and persons with disabilities - has moved upward for all the cohorts, with ageing States devoting the highest share (around 18 per cent) [Chart III.7]. This spending is largely driven by the expansion of direct benefit transfers, including the surge in cash transfers. Such expenditures have become a structural component of State budgets, driven by broad based policy imperatives rather than demographic pressure alone. If not managed carefully, the rising emphasis on such transfers risks constraining the ability of States to allocate adequate resources towards demographically sensitive areas such as health and education.

3.27 Among the three groups, ageing States exhibit the highest RECO ratio of 9.0 in 2024-25, nearly double that of the youthful States, signalling limited fiscal flexibility to scale up investment in critical areas such as geriatric support, public health, and long-term care systems (Chart III.5a). Committed expenditure also remains elevated at 32.4 per cent of total expenditure, reinforcing the constraints (Chart III.5b). For these States, greater efficiency in spending, targeted social support, and efforts to strengthen revenue mobilisation will be key to generate fiscal space for essential demographic-responsive spending.

4.3 Impact on Fiscal Sustainability

3.28 While population ageing has a negative impact on revenue mobilisation due to lower labour force participation and slower growth, States with higher percentages of elderly population require substantial resource allocation towards elderly care, including healthcare, social security, and infrastructure. This poses significant challenges for fiscal sustainability, limiting fiscal policy space and effectiveness (Bloom et al., 2010). The Organisation for Economic Co-operation and Development (OECD) countries have already experienced rising old-age dependency leading to higher fiscal deficits and debt accumulation. Similar patterns are emerging in advanced Asian economies like Japan and South Korea, where population ageing has intensified fiscal pressures. To safeguard against the adverse economic and fiscal consequences of population ageing, there is a need for fiscal buffers, improved quality of public finances and structural reforms (ECB, 2022).

3.29 The IMF’s Debt Sustainability Framework highlights that debt burden indicators, primary balance, and debt service costs are central to assessing medium to long-term vulnerabilities in public finances (IMF, 2013; 2021). Debt-GDP ratio (reflecting the overall debt burden), and interest payments to revenue receipts ratio (capturing the stress of debt servicing on fiscal resources) are the most widely used indicators of debt sustainability of a government. In India, different groups of States face distinct revenue and expenditure pressures, which shape their debt dynamics differently. Linking debt indicators to demographic patterns provides a more nuanced framework for evaluating fiscal sustainability and for designing differentiated fiscal strategies across States. The debt indicators presented here are constructed as simple averages of States belonging to each demographic cohort viz. youthful, intermediate, and ageing.

3.30 The Debt-GSDP trends show a clear demographic pattern, with youthful States desplaying relatively higher debt burden compared to the intermediate States in 2015-16 (Chart III.8a). In the Covid year of 2020-21, the debt ratios spiked across all demographic categories. The ageing States faced the maximum stress during this period, with debt levels significantly higher than those of youthful and intermediate States. By 2024-25, there has been some moderation in debt levels across all demographic groups as their economies recover, though the ageing States continue to bear the highest debt burden as they remained structurally vulnerable due to weaker revenues and elevated committed expenditure. The intermediate States registered relatively lower debt burden across the years compared to the other two groups. The lower debt-to-GSDP ratio of intermediate States, such as Odisha, Maharashtra, and Karnataka, compared to youthful States like Uttar Pradesh and Bihar, reflects multiple factors like stronger growth dynamics, robust industrial base, higher fiscal capacity, greater fiscal discipline and sustainable debt management practices (RBI, 2023; Mohan, 2023).

3.31 The interest payment to revenue receipts ratio (debt service ratio) highlights persistent fiscal stress, particularly among the ageing States. During the entire period between 2015- 16 and 2024-25, the debt-service burden of the youthful States remained lower than that of the intermediate States with the gap getting wider over time (Chart III.8b). While there has been some moderation in debt service ratio of both youthful and intermediate States in 2024- 25 from the Covid high of 2020-21, the ageing States continue to carry a heavier burden. These dynamics underline the fiscal vulnerability of ageing States, where rising interest commitments constrain spending flexibility. High debt service often crowds out productive public spending, such as investment in human and physical capital (Bacchiocchi et al., 2011).

5. Policy Options

3.32 The findings of the previous sections are consistent with the broader literature highlighting the role of demographic transitions in shaping fiscal performance. This calls for forward-looking policies incorporating population dynamics and the related fiscal challenges.

5.1 Policy Suggestions for Youthful States

3.33 The youthful States with relatively lower share of elderly population, and lower old-age dependency ratios, are in a position to reap the benefits of their large working-age populations. However, reaping demographic dividend in these States is not automatic but conditional on supportive socio-economic policy environment in terms of investment in human capital and employment opportunities. The review of expenditure profile during the last decade reveals that the share of public spending on education by the youthful States has declined over time, even as demographic pressures intensify. Thus, for them the policy priority should be to strengthen revenue mobilisation through broadening the tax base and simultaneously investing heavily in human capital and infrastructure to accelerate growth.

3.34 Second, these States should also proactively expand employment opportunities, particularly for youth, to convert their demographic dividend into sustained fiscal capacity. A boost to labour intensive sectors such as trade, transport, tourism, e-commerce, and other utility services can create jobs for unskilled and semi-skilled workforce. Alongside, it is also critical to ensure that the working age population in general, is suitably educated and skilled for jobs of the future in the era of artificial intelligence and automation. For the skilled workforce, promoting entrepreneurship, business-friendly policies, and labour market reforms are crucial for job creation. The Indian States have adopted various education and skill development policies suitable to their demographic structure (Annex III.1). India’s success in exporting Information Technology and Business Process Outsourcing services is a good example of how it has leveraged its demographic advantage.

3.35 Third, as States traverse through different stages of demographic transition, there has been a pronounced expansion in social sector outlays through cash transfer to women, farmers, and youth, pensions, and other welfare schemes. Once introduced, these schemes often acquire a quasi-committed character, making them difficult to scale back or discontinue. Although such interventions have deepened social safety nets, their growing scale calls for periodic review and sharper targeting. In youthful States, where the dividends from investing in early life nutrition, learning and skills are especially high, rising transfer commitments must not overshadow the imperative of building human capital.

5.2 Policy Suggestions for Intermediate States

3.36 Intermediate States are entering a phase where ageing pressures are becoming visible, with moderate increases in old-age dependency ratios. Meanwhile, the window for reaping demographic dividends in these States is gradually closing. Their fiscal stance should balance growth-enhancing investments with the need to gradually expand social security and healthcare systems.

3.37 Policies to encourage higher labour force participation - especially among women and older workers - will be critical to sustain economic dynamism. Equally important are productivityoriented reforms, such as technology adoption, innovation, and industrial diversification, which can help offset the slowdown in labor supply and ease long-term fiscal pressures.

3.38 Looking ahead, strengthening revenue capacity, and improving the quality and efficiency of government expenditure will be essential for creating durable fiscal space as demographic needs evolve. At the same time, early steps in building healthcare and pension buffers will help them avoid sharp fiscal adjustments once ageing pressures begin to mount in the coming decades. The pension reform carried out by Indian States by shifting from the defined benefit Old Pension Scheme (OPS) to the defined contribution National Pension System (NPS) is a major step forward to reduce the fiscal burden of population ageing.

5.3 Policy Suggestions for Ageing States

3.39 Ageing States are facing high oldage dependency ratios and rising social sector expenditure obligations. Rising oldage dependency ratios also suggest that the demographic transition currently confronting the ageing States, such as Kerala and Tamil Nadu, will gradually extend to today’s intermediate and youthful States (Table III.7). Addressing the mounting fiscal pressures stemming from population ageing and safeguarding public finance sustainability requires a comprehensive policy strategy.

3.40 Older people aged 60 or above usually have different needs and behaviour than younger individuals. Older individuals tend to work and save less, implying they offer less labour and capital to economies. They also require more health care and social security support compared to working age population. Thus, the ageing States should prioritise healthcare financing reforms, preventive health systems, and public–private partnerships, while rationalising subsidies and non-merit spending to create fiscal space. Tamil Nadu has implemented measures like doorstep delivery of medical services for elderly households; centres for day care and health services for senior citizens, and State pension schemes for the elderly and the vulnerable (Annex III.1). Ensuring universal access to quality health services together with increasing life expectancy can result in second and third waves of demographic dividend⁹ like in the case of East Asian economies (Box III.1).

3.41 Second, due to rising old-age dependency, the ageing States would witness a gradual decline in labour supply resulting in lower productivity and economic growth. In these States, however, healthier ageing could continue to boost labour supply by extending working lives and enhancing older workers’ productivity, offering a bright spot amid the rise of the silver economy (IMF, 2025). This will require a change in workforce policy of the States such as increasing the retirement ages beyond 60 years in alignment with the improved life expectancy. Employers may also adopt phased retirement plans, flexible work arrangements, and re-skilling programmes tailored for older workers.

3.42 Third, interstate migration could be another way to boost labour supply in the ageing States. Internal migration in India has been closely linked to regional disparities, with movement predominantly directed from less-developed to more-developed States (Srivastava, 2011; Das & Saha, 2013). Out-migration is currently heavily concentrated in a few States like Uttar Pradesh, Bihar and Rajasthan. Migration might cushion the decline in working-age population due to ageing, and, if fully integrated into the labour market, help by generating fiscal income.

3.43 Fourth, India must address its longstanding gender gap in labour force participation. Though India has witnessed a rise in the female labour force participation rate (LFPR) from 37.0 per cent in 2022-23 to 41.7 per cent in 2023-24, it still lags far behind the male LFPR of 78.8 per cent in 2023-24¹⁶. To avert an adverse impact of higher female labour force participation on fertility, policies should aim for improving the work-life balance for women, including improved parental leave systems, expanding on affordable childcare options, and promoting flexible work arrangements (Gu et al., 2024).

3.44 Fifth, the demographic transition characterised by an increasing share of elderly population imposes unique fiscal challenges on States. For instance, the ageing States having higher percentage of elderly are financially more burdened compared to the youthful and intermediate States. Integrating the elderly population into the tax devolution formula can significantly alter the distribution of resources among States, with those having higher shares of elderly populations benefiting more (Box III.2). Accordingly, with the rapidly changing population profile of States, the future Finance Commissions may explicitly incorporate population ageing as reflected in terms of higher share of elderly population or old-age dependency ratio into their devolution formula to ensure fiscal sustainability of the ageing States (Chakrabarty and Gupta, 2021; Chakrabarty and Singh, 2024).

6. Conclusion

3.45 The demographic transition across States in India is not uniform. The interstate variability in age structure results in diverse fiscal performance in terms of revenue realisation, quality of expenditure and debt sustainability. The youthful States exhibit strong revenue mobilisation supported by higher tax collections as well as higher central transfers; intermediate States display moderate and stable fiscal outcomes; and the ageing States face greater fiscal challenges on account of modest tax growth, and a lower share of central transfers. Regarding expenditure quality, the youthful States have relatively greater fiscal headroom to invest in human capital, and infrastructure; intermediate State show steady consolidation with measured containment of committed expenditure; while ageing States operate with tighter fiscal space due to higher committed outlays and demographic pressures. Supported by higher fiscal space, the youthful States are allocating a larger share to education and infrastructure; intermediate States are balancing developmental spending with welfare commitments; and ageing States are devoting a higher proportion towards old-age support. Taken together, the expenditure patterns across three groups reflect evolving priorities as States balance human capital investment, infrastructure needs, and rising welfare commitments amid changing demographic profiles.

3.46 The share of expenditure on education has moderated in all demographic groups, including the youthful States. Going forward, it is imperative for these States to invest heavily in education, skill building and job creation to take advantage of the demographic dividend of the younger population. Intermediate States need to balance growthoriented investments with the expansion of social security and higher labour force participation. Ageing States must prioritise healthcare and pension reforms, rationalise subsidies, and harness the silver economy to manage fiscal pressures sustainably.

¹ World Population Prospects, UN 2024.

² The term demographic dividend here refers to the economic growth potential during a period when the working-age population surpasses the dependent population.

³ Youth Dependency Ratio refers to the number of individuals in the 0-14 age group (youth dependents) expressed as a proportion of the working-age population (15-59 years).

⁴ Old-Age Dependency Ratio measures the ratio of population aged 60 years and above relative to the working-age population.

⁵ As per United Nations World Fertility Report (2024), a fertility level of around 2.1 births per woman yields a growth rate of zero in the long run for a population with low mortality and no migration. At this level, known as the “replacement level”, each generation is followed or “replaced” by another generation of roughly the same size.

⁶ The International Labour Organisation (ILO) defines a country as “aged” when the population aged 65 years and above constitutes 14 percent or more of the total, “ageing” when this share lies between 7 and 14 per cent, and “not aged” when it is below 7 percent. In this study, we have chosen 60 years instead of 65 years for demographic classification of States, as in India the retirement age is generally 60 years, and people are categorised as senior citizens for various government entitlements when they cross 60 years of age.

⁷ Goa and Union Territories (except Delhi and Jammu & Kashmir) are excluded from the analysis as detailed data on their demographic profile is not available in the Technical Group Report.

⁸ Committed expenditure consists of interest payments, administrative services, and pensions.

⁹ The old age dividend refers to the potential economic and social benefits of an ageing society, particularly if elderly individuals can remain active and engaged in economic, social and familial roles.

¹⁰ Primarily refers to Japan, South Korea, Taiwan, Hong Kong, Singapore, and China, while several studies on the East Asian miracle also included Malaysia, Indonesia, and Thailand, as the second tier newly industrialised economies (NIEs).

¹¹ The peak growth rates, however varied across the East Asian countries. While for Japan, the peak growth rates were observed during mid-1950s to early 1970s, for the four Asian Tigers (South Korea, Taiwan, Singapore, and Hong Kong) the peak growth occurred during 1960-1980s. For China, the peak was observed post-reform (1978), during 1980s-2000s, while for Singapore, highest growth was observed during early independence years (1960s-1990s).

¹² Dependency ratio is the ratio of dependents (people younger than 15 or older than 64) to the working-age population (those in age bracket 15-64).

¹³ Defined as number of persons in age group 15-64 per old person (aged 65 and above).

¹⁴ East Asian countries’ potential support ratio continued to be higher when compared with developing economies, though the gap reduced from mid-1990s.

¹⁵ Out-of-pocket health expenditure, as per cent of health expenditure (current) stood at 46 per cent for India, higher than the corresponding number for East Asia and Pacific (25.45 per cent) in 2022 (Source: Global Health Infographics, World Development Indicators, World Bank).

¹⁶ According to the Periodic Labour Force Survey 2023-24, LFPR is estimated in usual status. Link: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2057970&reg=3&lang=2

¹⁷ Population is considered as a neutral indicator of need since it provides a simple, quantifiable measure of a State’s size and the number of people it needs to serve. A larger population generally implies greater expenditure on public services like health, education, and infrastructure.

¹⁸ The classification of States into youthful, intermediate, and ageing cohort follows the same definition used in the Chapter. Goa and North-Eastern States (except Assam) are excluded from the analysis. The group averages are calculated as simple means of State-level shares.