States' Fiscal Deficit Widens to 3.3% in FY25: RBI Report

• States' consolidated fiscal deficit is projected to widen to 3.3% of GDP in FY25, up from 3% in the previous three fiscals.
• The increase is primarily due to higher borrowing by states under the central government’s 50-year interest-free loans for capital investment.
• Capital expenditure by states remained steady at 2.7% of GDP in FY23-24 and FY24-25, budgeted to rise to 3.2% in FY25-26.
• Consolidated outstanding liabilities of states are estimated at 29.2% of GDP by March-end 2026.
• Demographic shifts impact state finances: youthful states benefit from expanding workforce and stronger revenue, while aging states face fiscal pressures from shrinking tax bases and rising committed expenditure.

Why It Matters: States' fiscal deficit is widening due to increased capital investment borrowing, with demographic shifts posing future challenges.