Fiscal Discipline in Focus: Government Plans Deficit Reduction by FY26
The Indian Government recently announced to focus on improving the quality of spending which would bolster the social security net and aim at bringing down the fiscal deficit to below 4.5% of GDP by the fiscal year 2025-26 (FY26). Government’s dedication to reduce the monetary deficit aligns with its willpower to financial prudence while ensuring financial increase and social welfare.
The Union Government has shown commitment towards its roadmap to fiscal consolidation as announced in the FY21-22 Budget which aimed at reducing the fiscal deficit to below 4.5% of GDP by FY 25-26. This dedication is showcased in the Finance Ministry’s half yearly review of fiscal trends which comply with the Fiscal Responsibility and Budget Management Act, 2003. These announcements were tabled at Lok Sabha last week in the light of the upcoming Budget for FY 25-26 in Parliament on 1st February.
Going in depth of the Finance Ministry’s document, this push will be improving the quality of government spending while enhancing social security for the needy and poor. This measure would strengthen the nation’s macro-economic parameters and support financial stability. In the Budget of FY25, capital investment was hiked by 33% to Rs. 11.1 trillion (3.3% of GDP). Investment such as infrastructure, manufacturing, etc. leading to long-term while creating employment.
This fiscal consolidation thrust comes at the time of global uncertainties which are caused by wars in Europe and the Middle-East which have created inflationary pressures and caused domestic and global challenges on the face of development. India’s fiscal deficit peaked during the pandemic period at 9.2% in FY21 throwing light on the emergency spending at the time of crisis. Since the pandemic the government is aiming at consolidating fiscal deficit while ensuring the much needed funding to crucial sectors of the economy. The government’s macroeconomic measures have insulated the nation from getting affected by global pressures.
Going into the specifics, the budget estimates (BE) for FY 24-25 projected government expenditure of around Rs. 48.21 lakh crore. Out of the total expenditure, around Rs. 37.09 lakh crore gets allocated to revenue expenditure (including operational and recurring costs) and the remaining amounting to Rs. 11.11 lakh crore for capital expenditure (included long-term investment in infrastructure and developmental projects). Of the total expenditure, Rs. 21.11 lakh crore was in the first half of FY25 of about 43.80% of the budget estimates. Further, the projected figures for capital expenditure by the government (Capex) was about Rs. 15.02 lakh crore. Additionally, the Gross tax Revenue (GTR) was estimated at Rs. 38.40 lakh crore with a tax to GDP ratio of 11.8%. While, total non-debt receipt stood at Rs. 32.02 lakh crore, which comprised tax revenue of about Rs. 25.83 lakh crore, non-tax revenue was about Rs. 5.46 lakh crore and capital receipt of about Rs. 0.78 lakh crore.
With the above estimates of the cost of procurement, the fiscal deficit in BE 2024-25 was pegged at Rs 16.13 lakh crore or 4.9 per cent of GDP. Deficit in FY25 H1 is estimated at Rs 4.75 lakh crore or about 29.4 percent of BE. Funding the financial crisis by raising Rs 11.13 lakh crore from the market (G-sec + T-Bills), draw the remaining Rs 5 lakh crore from other sources, such as NSSF, State Provident Fund, external debt, which is lower than residual income and immediacy.
Discussing the impact of fiscal deficit on markets, there is a positive nudge witnessed in market sentiment. India’s benchmark 10-year bond yield fell sharply over four years in 2024 as government fiscal discipline and the addition of debt to global indices boosted demand, as investors waited for the domestic rate easing in 2025. The yield ended at 6.7597% on Tuesday, down 42 basis points on the year after falling 15 bps in 2023. This was the biggest fall since it fell 66 bps in 2020. Bond yields started the year on a downtrend, continuing to prompt the government to cut its borrowing, while strong demand from domestic and foreign investors meant that supply was taken early. The government adhered to its fiscal plan and reduced its fiscal deficit target as well as market lending, at a time when corpus with long-term investors such as insurance and pension funds had grown.
In summary, the Indian government’s commitment to decreasing the fiscal deficit to 4.5% of GDP by FY26 at the same time as improving expenditure and getting closer to financial consolidation. However, reaching these goals will require navigating complicated demanding situations, inclusive of populist pressures, international uncertainties, and revenue mobilization constraints. By keeping a strategic cognizance on best spending and lengthy-term sustainability, India can make sure that its economic rules help strong and inclusive economic increase.
The image added is for representation purposes only
