India’s Fiscal Architecture Cannot Manage Two Demographic Futures

NFHS-6 suggests India’s fiscal federalism is now managing states moving through fundamentally different demographic transitions. Kerala is ageing, Bihar remains young, yet the transfer architecture continues to treat these divergent realities through a common framework.

The demographic divergence is no longer marginal. Southern states of Andhra Pradesh, Karnataka, Kerala, Telangana and Tamil Nadu account for roughly 30% of India's GDP despite housing less than a fifth of its population. Yet they are expected to contribute only 9% of the country's population growth between 2011 and 2036. Bihar and Uttar Pradesh, meanwhile, generate less than 12% of GDP but account for a third of projected population growth. Economic heft is increasingly concentrated in one part of India, demographic momentum in another.

Kerala is already an older state by Indian standards. Just 22.1% of its population falls in the 15-29 age bracket, the median age is 37.7 years and 16.5% of residents are above 60. Tamil Nadu is following a similar trajectory, with a median age of 37.3 years and 13.6% of its population in the elderly category. Bihar presents the opposite profile: roughly 37–38% of its population falls within the youth cohort, the median age is 29.1 years and only 7.7% of residents are elderly. Uttar Pradesh has a youth share of 35–36%, a median age of 26.9 years and an elderly share of 8.1%. 

By 2036, Kerala's elderly population is projected to approach its youth population in absolute size; Bihar and Uttar Pradesh will remain among India's youngest states for at least another decade.

Ageing Costs
The fiscal consequences flow directly from the age structure. By 2036, nearly one in four Keralites will be over the age of 60. That shift will steadily redirect public spending towards geriatric healthcare, chronic disease management and long-term care, even as demand for schools and other youth-focused services levels off. The composition of public spending is shifting, and it is shifting away from what national transfer frameworks were designed to fund.

Bihar's problem runs in the opposite direction entirely. The state accounts for more than 9% of India's population but contributes less than 3% of national GDP, and it still needs classrooms built, teachers hired, maternal and child health services expanded and a rapidly growing workforce absorbed into something resembling productive employment. 

The architecture governing both was designed for a different moment. Finance Commission transfers, centrally-sponsored schemes and national programmes took shape when demographic differences across states were narrower and it was reasonable to assume they would eventually converge. That assumption is what NFHS-6 quietly dismantles. Some states are now managing the consequences of a transition largely behind them; others are still moving through its most demanding phase. The same formula cannot do justice to either, and the gap between the two is not closing.

Representation Stakes
The divergence is beginning to affect debates on representation as well as transfers. 

States that brought down fertility earlier have long maintained that population-weighted allocation formulas effectively penalise them for the very outcomes development policy was meant to achieve. Those concerns have intensified ahead of the forthcoming delimitation exercise, which could expand parliamentary representation for faster-growing states while eroding the relative influence of slower-growing ones. Demographic change has, in this way, become as much a question of political weight as fiscal distribution.

Labour migration has meanwhile become the principal mechanism through which India adjusts to this divergence in practice. Workers from Bihar, Uttar Pradesh and Odisha move south to staff construction sites, factories, warehouses and service businesses in Tamil Nadu, Karnataka and Maharashtra. The relationship is mutually beneficial. Receiving states gain workers they increasingly struggle to find locally, while sending states ease some of the pressure created by large numbers of young people entering the labour market each year. 

What it does not have is any serious institutional scaffolding. A worker from Patna employed in Coimbatore cannot reliably carry his health coverage with him. His children face obstacles in local schools. Welfare entitlements that exist on paper do not always travel. The result is that one of the most significant demographic adjustment mechanisms in India runs almost entirely on informality, and the administrative and fiscal costs of that informality fall on states that had no part in designing it.

The Fifteenth Finance Commission gave a 12.5% weight to demographic performance in horizontal tax devolution, an attempt to ensure that states which brought down fertility early do not find themselves penalised for it in allocation. That was a genuine concession to the argument. Yet tweaking a formula is not the same as redesigning the system. Kerala's priorities increasingly revolve around elderly care and healthcare provision. Bihar's remain centred on classrooms, maternal health and job creation. Both demands are legitimate, but neither fits comfortably within a framework that still relies heavily on national averages.

India's transfer architecture, its welfare systems, its approach to labour mobility — these were all built on the working assumption that states were moving through demographic transition together, at broadly similar speeds, towards a common destination. NFHS-6 suggests that assumption has expired. The Finance Commission can recalibrate at the edges, but the larger design problem remains: a fiscal structure built for convergence is now being asked to serve a federation that is diverging.