Two-Thirds of the Spending, Twenty-Eight Different Futures: Why One Fiscal Template Will Fail India's States

One Nation, Two Demographic Clocks: Why a Single Fiscal Template Will Fail Start with the

key fact: states account for about two-thirds of general government expenditure. Schools, hospitals, police, water supply, pensions and most of the services a citizen actually sees are paid for from state budgets. So when the RBI's DEPR paper estimates that India needs about 8% real growth a year to reach developed status by 2047, it is effectively telling state finance ministers that most of that growth has to be financed through their budgets.

The paper's more important point is less obvious. The pressures it lists do not fall on every state in the same way.

Two different pressures Compare a young state with an old one.

In Bihar, NFHS-5 put the total fertility rate at about 3.0. A large share of the population is children and young adults. The spending pressure is on classrooms, anganwadis, nutrition and skilling: building human capital before the demographic dividend passes.

In Kerala, NFHS-5 put fertility at about 1.8, below replacement. The population is older. The spending pressure is on pensions, geriatric healthcare and long-term care: supporting people who have already built that capital.

The mechanism is the same in both: demographic structure determines which items in the budget grow automatically. In an ageing state, pensions and health are committed spending that rises every year whatever the government decides and it squeezes out capital investment.

In a young state, the cost is the opportunity lost if schools and skilling are underfunded while the working-age population is large. Both are serious fiscal stresses, but they are different problems and need different remedies.

The other pressures fall unevenly too -

Climate risk: coastal states face cyclone and flood rebuilding costs, Himalayan states face landslide and glacier hazards and drought-prone states face farm distress. Adaptation budgets have to follow local hazard.

• AI and automation: states whose jobs are concentrated in routine services and clerical work face larger reskilling bills than largely agrarian states.
• Urbanisation: fast-urbanising states need water, transit and housing investment at a pace that slower ones do not.

Why one template fails India's fiscal rules tend to treat states alike: common deficit and debt ceilings and similar borrowing limits.

A single ceiling can be too tight for a young state that needs to invest in human capital now and too loose for an ageing state building up pension liabilities it cannot see. Some states returning to the old pension scheme shows how quickly future pension costs can be taken on for short-term political reasons.