States will need to overhaul their spending priorities and strengthen their finances as demographic ageing, rapid technological change, urbanisation and climate risks reshape expenditure demands, according to a background paper the Centre shared with the states over the weekend.
With states accounting for around two-thirds of general government expenditure, the paper said their fiscal capacity, quality of spending and investment decisions would be critical to sustaining growth, building human capital and ensuring inclusive development as India seeks to become a developed economy by 2047.
The paper, shared by the Union Finance Ministry ahead of the conference with state finance ministers on September 18-19, was authored by Sangeeta Das and V. Dhanya from the Reserve Bank of India’s Department of Economic and Policy Research.
The paper estimates that India would need to grow at around 8% annually in real terms to achieve its 2047 development goal, putting the onus on states to maintain sustainable public finances while responding to emerging demands.
State finances are currently marked by a broadly contained fiscal deficit, improving expenditure quality and resilient own-tax mobilisation, but expenditure pressures, limited revenue and elevated debt remain concerns.
“The key challenge for State finances would, therefore, be to accommodate various emerging demands, while preserving fiscal sustainability and ensuring that public investment is not crowded out by rising committed and welfare-related expenditures,” the paper said.
India’s median age is projected to rise from 29 years currently to 37 years by 2047, while the old-age dependency ratio is expected to nearly double from 11.1% in 2026 to 20% in 2047. States with ageing populations will face higher healthcare and pension costs, while younger states will need to prioritise education, skills, nutrition and employment-oriented infrastructure.
Technology, meanwhile, will require greater investment in skills as automation and artificial intelligence reshape the labour market. The paper said digital infrastructure could also improve fiscal efficiency and service delivery, with direct benefit transfers already helping states reduce overlaps and leakages.
Climate change is likely to add another layer of fiscal pressure, particularly through spending on resilient infrastructure, agriculture, water and urban systems. The paper called for climate considerations to be integrated into mainstream expenditure planning through measures such as climate-budget tagging and green budgeting.
On revenues, it said states must broaden their tax bases, improve compliance and make better use of non-tax revenues and public assets. States’ own-revenue buoyancy averaged 1.4 during 2021-22 to 2025-26 (Budget Estimate), while own-tax revenue grew 11.6% over the past decade at the consolidated level.