Fiscal deficit target for FY26: A step toward sustainable growth, debt management

By: Shantanu Bhattacharji

India’s FY27 debt framework aims for sustainable debt levels, aligning with global norms. It seeks a balance between deficit cut and growth, positioning fiscal consolidation to support long-term economic stability and development.

The Centre is poised to meet its fiscal deficit target of below 4.5 per cent of GDP (gross domestic product) by FY26, indicating a strong recovery from Covid-19 pandemic blow. Notably, this trajectory demonstrates the government’s pledge to fiscal prudence, with a shift toward adopting debt as the central policy anchor starting FY27. Also, the government’s adherence to its FY26 deficit target shows a balanced strategy, combining fiscal responsibility with measures to sustain economic recovery.

The comprehensive debt framework, set to debut in FY27, aims to maintain sustainable debt levels in line with global standards, ensuring long-term fiscal stability. This roadmap aligns deficit reduction with growth initiatives, striking a balance between fiscal consolidation and fostering economic activity.

By prioritising transparency and strategic clarity, the framework is likely to boost investor confidence and enhance India’s reputation as a stable fiscal entity. This shift toward debt-focused fiscal anchoring represents a structural evolution in fiscal policy, reinforcing the commitment to macroeconomic stability. While challenges such as expenditure pressures and revenue generation persist, the government’s strategy signals a decisive move toward balancing growth and fiscal sustainability.

India’s fiscal health has shown resilience in the first half of the fiscal year, according to the Finance Ministry’s “Mid-Year Review of Trends in Government Receipts and Expenditure” published in December. The government’s revenue collections have surpassed 52 per cent of the projected Budget Estimates, marking an improvement over the five-year rolling average and suggesting a more efficient revenue generation mechanism. Meanwhile, the fiscal deficit remains within expected levels, pointing to disciplined spending and adherence to the fiscal consolidation framework.

However, while the fiscal outlook remains positive, the country faces ongoing challenges in balancing expenditure needs. Rising costs due to subsidies and infrastructure investments, coupled with potential external economic risks, continue to place pressure on the budget. As the Union Budget approaches, the government will need to carefully navigate these challenges, ensuring fiscal discipline while addressing the growing financial demands necessary to sustain the country’s economic momentum. The review serves as both an affirmation of fiscal strength and a call for strategic balance, as India looks to harmonise prudent financial management with the ambition of robust, inclusive growth amid global headwinds.

Analysts say that while revenue receipts have exceeded the five-year rolling average, the lingering effects of the pandemic must be taken into account. The exceptional circumstances of the Covid-19 years have distorted the fiscal baseline, which means the “above-average” figures may not reflect a true recovery. Therefore, the observed improvement in revenue collection should be interpreted with this context in mind, reducing its significance as a reliable indicator of sustainable growth.

A notable concern raised in the review is the slower pace of capital expenditure. While this controlled spending because of the Lok Sabha elections has kept the fiscal deficit in check, it poses a potential roadblock to long-term growth. Capital expenditure is a key driver for infrastructure development and economic expansion. Scaling it up would be essential to maintain growth momentum, but such an increase risks breaching the fiscal deficit targets set by the government.

Although current fiscal deficit numbers appear to be within manageable levels, there’s a caveat: these figures might not fully reflect the final nominal GDP against which the deficit will ultimately be calculated. Returning to pre-planned expenditure levels could push the government beyond its deficit targets, creating the risk of an overshoot. This highlights the delicate balancing act ahead.