Wednesday, 11 Feb, 2026
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The Centre has said the Commission’s recommendations will be reviewed and implemented in due course, paving the way for a gradual recalibration of India’s fiscal framework over the rest of the decade
The 16th Finance Commission has laid out a roadmap for restoring fiscal discipline at the Centre while continuing to prioritise growth-oriented spending, signalling a calibrated shift towards consolidation without retreating from development goals.
Using the Budget Estimates for 2025–26 (FY26) as the base year, the Commission has projected fiscal outcomes up to 2030–31 (FY31), assuming nominal GDP growth of 11 per cent annually over the period. The framework seeks to repair the quality of public finances by eliminating the revenue deficit even as capital expenditure continues to expand.
On the revenue side, the Commission has projected a steady rise in receipts, from Rs 34.2 lakh crore in FY26 to Rs 55 lakh crore by FY31. Over the same period, revenue expenditure is estimated to increase from Rs 39.4 lakh crore to Rs 54.6 lakh crore. This trajectory is expected to compress the revenue deficit sharply, from Rs 5.24 lakh crore— equivalent to 1.5 per cent of GDP — in the base year to just Rs 36,000 crore by FY31, effectively generating a marginal surplus of 0.1 per cent of GDP.
The Commission noted that this turnaround would restore balance on the revenue account and significantly improve the quality of Union government spending. It also projected a marked improvement in the effective revenue deficit, which adjusts the headline figure by excluding grants meant for capital creation. The effective revenue deficit is estimated to move from 0.3 per cent of GDP in FY26 to a surplus of 1.1 per cent of GDP by the end of the award period.
At the same time, the Commission has underlined the need for the Centre to sustain and expand capital expenditure. Central capital outlay is projected to rise from ₹11.2 trillion, or 3.1 per cent of GDP, in FY26 to Rs 23 lakh crore, or 3.8 per cent of GDP, by FY31. This includes a significant increase in interest-free 50-year loans to states under schemes such as the Special Assistance to States for Capital Investment, which are projected to double from Rs 1.7 lakh crore trillion to Rs 3.4 lakh crore.
The report also places particular emphasis on defence spending. It records that in its memorandum submitted to the Finance Commission in July 2025, the Union government had stressed the need to raise defence expenditure to achieve multi-domain operational capabilities. The Commission agreed with this assessment and recognised the requirement for higher capital spending on defence.
Accordingly, defence capital expenditure is projected to grow at an annual rate of 30 per cent, rising from Rs 1.8 lakh crore in FY26 to Rs 6.7 lakh crore by FY31. This expansion would lift total defence expenditure from 1.4 per cent of GDP in the base year to 1.9 per cent by the final year of the award period. The Commission, however, cautioned that such an ambitious ramp-up would necessitate serious structural reforms, particularly in long-term planning and procurement processes, to ensure efficiency and value for money.
Taken together, the compression of the revenue deficit and the sustained expansion of capital spending are expected to yield a steady reduction in the fiscal deficit. The Commission has projected the fiscal deficit to fall from 4.4 per cent of GDP in FY26 to 3.5 per cent by FY31.
This consolidation path is also expected to strengthen the Centre’s balance sheet. Outstanding debt of the Union government is projected to decline from 55.1 per cent of GDP in FY26 to 49.5 per cent by FY31, implying a correction of roughly 7.5 percentage points over the award period.
The government has indicated that the Commission’s recommendations will be examined and acted upon in due course, setting the stage for a gradual but sustained recalibration of India’s fiscal framework over the remainder of the decade.
