KOCHI: The Reserve Bank of India wants Kerala to age gracefully and responsibly. Categorising the state as an “ageing” society, with 18.7% of its population now above the age of 60, the RBI has called for a set of urgent reforms — from restructuring of pensions, to extension of the retirement age and changes to financing of healthcare.
With the state’s elderly population projected to rise further to 20.9% by 2031 and 22.8% in 2036, it warns that ageing will steadily tighten fiscal space and strain social sector spending unless the government acts early with structural policy measures.
The guidelines are part of a report, titled ‘State Finances: A Study of Budgets of 2025-26 - Demographic Transition in India: Implications for State Finances’, released by the central bank on Saturday. The report links demographic change to the long-term sustainability of regional budgets and argues that states like Kerala and Tamil Nadu will face mounting pressure from higher old-age dependency ratios, rising pension commitments and greater healthcare needs. The RBI defines a state as “ageing” if the share of population aged 60 and above is 15% or more, “intermediate” if it is 10% to below 15%, and “youthful” if it is below 10%.
Alongside its growing elderly population, Kerala is expected to witness a steady decline in its working-age population share — a key factor determining economic growth and tax revenues.
The RBI said Kerala’s working-age population share, currently at 62%, is projected to decline to 60.8% in 2031 and further to 59.5% in 2036.
‘Contraction of labour pool could impact productivity’
This contraction of the labour pool could impact productivity and economic expansion, even as the demand for social support rises, the report said.
The RBI stressed that demographic transition can weaken a state’s fiscal sustainability through a twin squeeze: Slower revenue growth and higher expenditure needs. “While population ageing has a negative impact on revenue mobilisation due to lower labour force participation and slower growth, States with higher percentages of elderly population require substantial resource allocation towards elderly care,” it said, warning that this poses “significant challenges for fiscal sustainability, limiting fiscal policy space and effectiveness.”
A key concern is the growing pension burden. The RBI noted that ageing states, on average, allocate close to 30% of their total social sector spending to pensions, the highest among demographic cohorts. “Pension burdens have increased in tandem with the rising share of elderly population,” the report said, cautioning that even intermediate and youthful states may see pension liabilities “escalate rapidly” in the coming years as life expectancy rises and coverage expands.
It also pointed to the rising share of social security and welfare expenditure – including spending on women, children, the elderly and persons with disabilities – across all state groups, with ageing states devoting the highest share, around 18%. While such spending is partly driven by expanding direct benefit transfers and policy imperatives, the central bank warned that if not managed carefully, rising emphasis on cash transfers could constrain states’ ability to invest in demographically sensitive areas such as health and education.
To respond to mounting pressures, RBI recommended that ageing states prioritise healthcare financing reforms, preventive health systems and public-private partnerships, while “rationalising subsidies and non-merit spending” to create fiscal space. It also highlighted the potential of “healthier ageing” to soften the labour shock. “This will require a change in workforce policy… such as increasing the retirement ages beyond 60 years in alignment with improved life expectancy,” the report said, adding that employers could adopt phased retirement, flexible work arrangements and re-skilling programmes tailored for older workers.
RBI also flagged interstate migration as another channel to boost labour supply in ageing states, noting that internal migration in India is closely linked to regional disparities and typically flows from less-developed to more-developed states. Drawing parallels with East Asian economies, the report pointed out that countries such as Japan and South Korea introduced pension reforms, raised retirement ages and built long-term care insurance systems to manage fiscal stress from ageing. It argued that universal access to quality health services, along with improved life expectancy, could even enable “second and third waves of demographic dividend” by increasing savings among mid-aged workers and tapping the productive potential of healthier elderly citizens.