‘Catch them young’ will soon be passé, if this report becomes reality

On 23 January 2026, the Reserve Bank of India (RBI) released a report titled ‘State Finances: A Study of Budgets of 2025–26’. The report points to a vital demographic turning moment where India’s fiscal landscape is being radically transformed by different state-level age structures.

The median age in India is 28, and the working-age demographic (15-59) currently is at its historical peak. The ‘demographic turning point’ – is the specific year when a State’s share of working population begins to decline.

This, however, varies significantly across the country, driving the fiscal divergence between the states.

Classification of States by demographic stage

The RBI categorises states into three groups, each facing unique fiscal pressures: 

1. Youthful States (e.g. Bihar, Uttar Pradesh and Madhya Pradesh):

These states are characterised by a higher young age population and a low median age (averaging 23-25 years), with Bihar standing at the youngest end with a median age of 23 years. Although these states have the highest young-age dependency ratio, their old-age dependency ratio remains lowest in the country, ranging between 14.0 and 17.8 percent.

They maintain a Total Fertility Rate (TFR) substantially over the replacement level of 2.1 (e.g., Bihar at 2.98), ensuring their workforce will not peak until around 2031.

Fiscally, this creates a wider ‘window of opportunity’ than in other states, as the pension burden remains relatively low.

This young age population creates a ‘window of opportunity’, for revenue mobilisation, as economic growth will be supported by an increasing labour force. However, for this to materialise, the States must prioritise massive Human Capital Investments — mainly in education and skilling — to successfully harness this potential demographic dividend.

2. Intermediate States (e.g. Telanganaand Uttarakhand)

The ‘window of opportunity’ for states in this category is entering a transitional phase, narrowing as the growth of the working-age population slackens.While their current median age (averaging 30-32 years) is higher than youthful states, they have not yet reached the demographic turning point (the stage where the working-age share officially begins to decline).

Consequently, the window for high revenue mobilisation growth is closing, prompting a shift in fiscal planning.

The report estimates that by 2036, it is estimated that more than half of Indian states will have above 15 percent of their population aged 60 and above. Therefore, these states must adopt a dual fiscal strategy: sustaining growth-enhancing investments in infrastructure to support current workforce and creating social security and healthcare buffers to prepare for inevitable fiscal pressures of an ageing population.

3. Ageing States (e.g., Kerala, Tamil Naduand Punjab):

These states have already crossed the ‘demographic turning point,’ where the share of the working-age population has begun to decline. They exhibit the highest old-age dependency ratios in the country, with Kerala reaching a median age of approximately 37 years.

In these States, the share of working-age population has already begun to decline. These States have crossed the ‘demographic divergence’ as they exhibit the highest old-age dependency ratios — ranging from 30.1 to 38.3 percent — and the highest median age in India, with Kerala reaching 37 years.

As the Total Fertility Rates (TFR) fall considerably below the replacement level (approximately 1.5 to 1.8), these regions face a structural decline of their tax-paying base.

Fiscally, these states confront a declining tax base and a substantial increase in committed expenditure; notably, in 2024-25, they allocated nearly 30 percent of their social sector expenditures exclusively to pensions.

To ensure long-term sustainability, the RBI report recommends harnessing the ‘silver economy’.  This involves adopting flexible employment alternatives for the elderly and aligning retirement ages with higher life expectancy to manage rising healthcare costs and committed revenue expenditures.

For the 2026-31 award period, the Sixteenth Finance Commission can utilize the RBI State Finances Report 2025-26 as a strategic blueprint to factor in demographic transformations, such as a growing elderly population, within the vertical and horizontal devolution criteria.

Conclusion

RBI’s research indicates that State populations in India are no longer uniform and are facing a profound demographic transformation.

Divergence in age structure across the States leads to varied fiscal outcomes regarding income, spending, and debt.

The divergence of states into ‘youthful’ and ‘ageing’ demographics means a uniform fiscal approach is no longer feasible.

For future economic stability, it’s crucial for youthful states to transform their populations into productive human capital through targeted social spending, while and ageing States should utilize the ‘silver economy’ and TFP to foster continued growth despite a declining workforce.

Finally, this necessitates the implementation of distinct fiscal policies to ensure national economic equilibrium.

India’s fiscal outlook over the next decade will be defined by how effectively the States embrace and adopt these policies.