This paper establishes the empirical relationship between the fiscal policy, demographic transition and public spending or expenditure on education in India with special reference to higher education. Public higher education spending is shown to be related to fiscal policy, if such expenditure is budgeted by the General Government and financed by general taxation and/or public debt. Demographic transition is analysed by population age structure transition and shown to impact on decline in enrollment in education through transition in Education Dependency Ratio. A forward-looking economic-demography model is used to forecast up to 2050 the interactive effects of demographic transition and public higher education expenditure within the framework of fiscal policy in 2011–12. Overall results indicate that, other things being equal including public expenditure commitment to education, demographic transition results in (a) additional budgetary resources for higher education without additional taxation, cut in expenditure benefits and new public debt and (b) decline in public education expenditure generosity by all levels of education in general and higher education in particular. This offers a new macroeconomic evidence for innovative public financing of higher education in India and lessons for other developing countries.