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ARTHA

Demographic Transition and Fiscal Implications for States

India’s demographic transition is marked by declining fertility, rising life expectancy, and shifting age
composition, which has created a demographic dividend window at the national level. However, this dividend is
unevenly distributed across states, leading to differentiated fiscal trajectories. At the aggregate level, India’s
working-age population continues to expand, with falling youth dependency ratio , but increasing old age
4
dependency ratio . As states move along the demographic transition, the fiscal burden gradually shifts from
3
growth-enhancing investments (education, skilling) to age-related expenditures such as healthcare, pensions,
and social security. Crucially, while some states are still benefiting from a rising working-age population, others
are already experiencing ageing pressures, resulting in asymmetric fiscal demands and capacities.

Youthful States: Harnessing the Demographic Dividend

States with relatively young populations—such as Bihar, Uttar Pradesh, Madhya Pradesh, and Rajasthan—are
positioned to benefit from a demographic dividend. Higher population growth and expanding labour forces can
broaden the tax base and support revenue growth if effectively leveraged. However, it requires sustained
public investment in education, skill development, healthcare, and job creation. Fiscal policy in these states
must prioritize human capital formation and infrastructure, enabling productive employment opportunities for
the workforce. Consequently, stronger revenue mobilization in such states is closely linked to their ability to
convert demographic potential into economic outcomes.

Intermediate States: Balancing Growth and Transition

States such as Karnataka, Odisha, Telangana, and Maharashtra fall into an intermediate category, where
demographic transition is underway but not yet complete. These states benefit from relatively stable work-
ing-age populations and stronger economic bases. The fiscal challenge is to sustain growth while preparing
for gradual ageing. Policy priorities include innovation, urban infrastructure development, and labour market
reforms, alongside early investments in healthcare and pension systems. These states are also better
positioned to enhance tax buoyancy, given higher income levels and diversified population.

Ageing States: Managing Fiscal Pressures

States such as Kerala, Tamil Nadu (in advanced transition pockets), and Himachal Pradesh are experiencing
ageing populations, characterized by rising old-age dependency ratios. These states face structural fiscal
pressures, as ageing reduces the tax base while increasing spending on pensions, healthcare, and social
welfare. Data indicates that committed expenditure remains elevated (over 30 per cent of total expenditure in
some cases), limiting fiscal flexibility. These states must focus on enhancing revenue capacity, improving
expenditure efficiency, and reforming pension and healthcare systems.

India’s demographic transition is not uniform, and the sustainability of state finances increasingly depends on
aligning fiscal strategy with demographic indicators.

3 The youth dependency ratio measures the population aged 0–14 as a share of the working-age population (15–59 years).
4 The old-age dependency ratio represents the proportion of individuals aged 60 and above, relative to the working-age population.

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