India’s FY26 Fiscal Deficit: Performance, Drivers, and Policy Implications

 India’s FY26 Fiscal Deficit: Performance, Drivers, and Policy Implications 

Abstract

This paper analyzes the Government of India’s fiscal performance in FY2025–26 (FY26), focusing on its efforts to meet and potentially exceed the 4.4% of GDP fiscal deficit target set in the 2025 Union Budget. While nominal GDP growth was revised downward by the National Statistical Office (NSO), fiscal consolidation dynamics remain resilient. Using government data, expert commentary, and real-time indicators, this study presents a comprehensive narrative on fiscal outcomes, drivers, risks, and forward policy actions.

Keywords

Fiscal deficit, nominal GDP, real GDP, fiscal consolidation, Union Budget 2025–26, revenue receipts, capital expenditure, tax buoyancy, non-tax revenues, government borrowing, FRBM targets, public debt sustainability, NSO estimates, GDP denominator effect, fiscal credibility, public finance, budget execution, economic growth, investor confidence, expenditure discipline

1. Introduction

The fiscal deficit is a vital macroeconomic indicator that measures the gap between government expenditure and revenue (excluding borrowings). In India’s evolving fiscal roadmap under the Fiscal Responsibility and Budget Management (FRBM) Act, gradual consolidation has been a central theme. In FY25, the government recorded a fiscal deficit of 4.8% of GDP, slightly better than its 4.9% target. For FY26, the Centre set a firmer target of 4.4% of GDP — a continuation of fiscal discipline coupled with growth priorities.

This paper investigates whether India is on track to achieve this target, examines the impact of revised GDP estimates on fiscal math, and distills macro-fiscal insights for future policy reforms.

 

2. Budget Framework and Targets

2.1 FY26 Fiscal Deficit Target

In the Union Budget 2025–26, Finance Minister Nirmala Sitharaman pegged the fiscal deficit for FY26 at ₹15.69 lakh crore, equivalent to 4.4% of GDP. This target follows the government’s commitment to gradual fiscal consolidation — from 4.8% in FY25 to 4.4% in FY26.

This consolidation roadmap aligns with long-term goals of reduced debt burden and enhanced sovereign creditworthiness.

2.2 GDP and the Deficit Denominator

On 7 January 2026, the NSO released the First Advance Estimates showing slower nominal GDP growth of 8.0% for FY26 compared to earlier projections near double digits. Real growth was placed at 7.4%, indicating robust activity, while nominal growth deceleration raised concerns about tax buoyancy and revenue estimates.

However, the overall nominal GDP at current prices — estimated at ₹357.14 lakh crore — is close to budget assumptions, helping stabilize the fiscal deficit’s denominator.

 

3. Impact of Nominal GDP Revision

Fiscal deficit as % of GDP depends on both numerator (deficit ₹ amount) and denominator (GDP). A downward revision in nominal GDP can mechanically inflate the deficit ratio.

• Key Insight:
Despite lower nominal growth, softer wholesale price trends — especially for food and oil — reduced the gap between nominal and real GDP, mitigating the denominator effect.

• Tax Revenue Challenge: Lower nominal growth pressures tax collections, with an estimated ₹1.9 trillion shortfall in gross tax revenues relative to budgeted assumptions. The impact on overall fiscal math could be cushioned via unused GST compensation cess funds (~₹0.5 trillion).

 

4. Fiscal Performance Indicators: April–September FY26

Fiscal performance in the first half reflects key signals:

4.1 Deficit Progress

By September 2025, the fiscal deficit reached approximately ₹5.73 lakh crore, equal to 36.5% of the annual budgeted target — slightly higher than the historical pace but still manageable. Higher capital expenditure contributed to this proportion.

4.2 Revenue and Expenditure Trends

• Revenue Receipts: Government data indicates total receipts as a share of budget estimates approximating 49.5%, underlining strength in non-tax revenues and revenue buoyancy.

• Capital Expenditure: Capex stood at 51.8% of the year’s target by mid-year, demonstrating effective spend execution.

Capital expenditure outlays — often expanded to boost growth and productive capacity — are critical for long-term macroeconomic health.

 

5. Analysis by Experts

5.1 PwC Perspective

According to PwC Partner Ranen Banerjee, the government is on track to meet — or even undershoot — the 4.4% target, potentially reaching as low as 4.3% of GDP, signaling stronger fiscal credibility to global investors.

This reflects solid expenditure control and robust revenue generation, despite slower growth in some tax categories.

5.2 Independent Views

Competing views exist. Some analysts caution that tax collections may lag full-year targets, especially in GST and direct taxes, due to a nominal growth slowdown and tax relief measures.

 

6. Comparative Context: FY25 vs FY26

Aspect	FY25 Target (% GDP)	FY25 Outcome	FY26 Target (% GDP)	FY26 Status
Fiscal Deficit	4.9%	4.8% (achieved)	4.4%	On track (poss. 4.3%)
Nominal GDP	–	₹330.68 lakh crore	–	₹357.14 lakh crore (est.)

This comparison underlines the continuity in fiscal consolidation efforts.

 

7. Drivers of Fiscal Performance

7.1 Revenue Side

• Tax Revenues: Core tax collections remain the largest fiscal plank. Even as some categories lag due to macro slowdown, enhanced compliance and broadened tax base help sustain revenue.
• Non-Tax Receipts: Higher dividends from public sector undertakings and RBI transfers have buoyed receipts.

7.2 Expenditure Discipline

• Revenue Expenditure: Restrained to avoid crowding out capex.
• Capital Outlays: Elevated capex is aimed at medium-term growth and employment creation.

Effective expenditure prioritization is central in maintaining fiscal health while enabling growth.

 

8. Risks and Uncertainties

8.1 Revenue Growth Risk

Slower nominal growth could dampen tax buoyancy, especially indirect taxes like GST.

8.2 External Shocks

Global inflation, oil price volatility, and geopolitical tensions can affect imports, fiscal transfers, and debt servicing costs.

8.3 Debt Sustainability

India’s public debt still remains above historical averages, emphasizing the need for fiscal prudence alongside growth stimulation.

 

9. Policy Implications and Recommendations

9.1 Strengthening Tax Administration

Improving compliance, digitization of tax processes, and targeted enforcement can enhance revenue without altering rates.

9.2 Rationalizing Subsidies

Reducing subsidy leakages and reallocating budget space to capital outlays can improve fiscal health.

9.3 Structural Reforms

Labour, land, and product market reforms will support growth, indirectly aiding tax buoyancy.

 

10. Conclusion

India’s FY26 fiscal performance reflects a judicious balance between consolidation and growth. Despite challenges from nominal GDP revisions and revenue pressures, the government’s disciplined expenditures, strong capex push, and resilient non-tax receipts maintain the trajectory toward the 4.4% deficit target, potentially exceeding it. These signals project macroeconomic stability and build confidence among global investors.

Ongoing vigilance on revenue trends, structural reform, and investment-oriented expenditure will be decisive in sustaining fiscal credibility beyond FY26.

Teaching Notes (Instructor Use)

Learning Objectives

By the end of this case, students should be able to:

1.      Explain how fiscal deficit is calculated.

2.      Interpret the impact of nominal vs. real GDP changes on fiscal ratios.

3.      Analyze drivers of deficit reduction (revenue & expenditure choices).

4.      Evaluate the trade-off between growth spending and fiscal prudence.

5.      Assess whether India’s FY26 performance aligns with long-term FRBM goals.

Key Discussion Questions

1.      How did the revision in nominal GDP affect deficit-to-GDP calculations?

2.      Why does strong capital expenditure not necessarily worsen the deficit signal?

3.      What factors enable India to potentially undershoot the deficit target?

4.      Which risks may derail fiscal consolidation before FY27?

5.      How should India balance public debt reduction with development spending?

Suggested Classroom Activities

·         Group Exercise: Students forecast FY27 deficit using three scenarios (optimistic, base, pessimistic)

·         Data Lab: Use monthly Controller General of Accounts updates to track deficit trajectory

·         Policy Debate: “India should pause fiscal consolidation to prioritise growth — agree/disagree?”

Assessment Ideas

·         500-word reflection on why markets prefer predictable deficits

·         Chart plotting trend from FY20 → FY26

·         Policy memo to Finance Ministry recommending 3 revenue-side reforms

References

1. Government expected to achieve fiscal deficit target of 4.4% in FY26 and potentially better it — PwC analysis.
2. NSO’s First Advance Estimates showing real GDP growth of 7.4% and nominal growth of 8% for FY26.
3. FY26 first-half fiscal deficit data showing 36.5% of full-year target.
4. Debate over tax revenue performance and future risks.

Others References

·         Government of India. (2025). Union Budget 2025–26: Budget at a Glance. Ministry of Finance.

·         National Statistical Office. (2026). First Advance Estimates of National Income 2025–26. Government of India.

·         Controller General of Accounts. (2025). Monthly Accounts: April–September 2025. Ministry of Finance.

·         Banerjee, R. (2025). PwC analysis on fiscal consolidation outcomes. The Economic Times.

·         CareEdge Ratings. (2025). Analysis of tax revenue trends and fiscal vulnerability. Mint.

·         Whalesbook. (2025). Government fiscal deficit performance update (Hindi edition).
https://www.whalesbook.com

·         The Statesman. (2026). India’s GDP growth outlook 2025–26: NSO estimates.

·         Livemint. (2025). Tax collections and fiscal headroom challenges: FY26 mid-year analysis.

 

📈 D. Fiscal Deficit Graph (FY25 → FY26)

(Generated per your request — visible above)

Dataset (Illustrative, based on official targets/outturns):

Fiscal Year	Deficit (% of GDP)
FY25	4.8% (actual)
FY26 Target	4.4%
FY26 Best Case	4.3% (estimate)