Union Budget balances fiscal and growth objectives, says RBI report

With a fiscal deficit target of 4.4 per cent of gross domestic product (GDP), the Union Budget 2025-26 (FY26) has managed to balance fiscal consolidation and growth objectives, according to a report authored by Reserve Bank of India (RBI) staff members.

 

The report was published in the RBI’s bulletin for February.

 

According to the report, the Budget reaffirms the government’s commitment to fiscal discipline while fostering inclusive, long-term economic growth in line with the vision of Viksit Bharat.

 

The Budget targets a gross fiscal deficit (GFD) of 4.4 per cent of GDP in FY26, down from the Revised Estimate (RE) of 4.8 per cent in 2024-25 (FY25), adhering to its objective of bringing the GFD below 4.5 per cent of GDP by FY26.

 

From 2026-27 onwards, the central government also aims to maintain the fiscal deficit on a trajectory that ensures a declining public debt-to-GDP ratio, reaching around 50 per cent by March 2031.

 

According to the report, the Budget focuses on accelerating growth, securing inclusive development, invigorating private sector investments, uplifting household sentiment, and enhancing the spending power of India’s rising middle class.

 

The report also highlights that on the direct tax front, the Budget proposal of tax relief amounting to ₹1 trillion is expected to bolster household disposable income and stimulate consumption, savings, and investment.

 

According to the report, the revised Budget Estimate for FY25 pegs the GFD at 4.8 per cent of GDP, compared to the budgeted 4.9 per cent. The 10-basis-point drop in the fiscal deficit is attributed to lower capital expenditure (capex).

 

Meanwhile, the consolidation of the fiscal deficit to 4.4 per cent in FY26 is expected to be achieved through the containment of revenue expenditure at 11 per cent of GDP and maintaining capex at 3.1 per cent of GDP while augmenting gross tax revenues to 12 per cent of GDP, the report observed.

 

The government’s outstanding debt is projected to decline to 56 per cent of GDP from 57.1 per cent in the RE for FY25.

 

“Going forward, the government has indicated that it would maintain a fiscal deficit level that will help bring the Centre’s debt-to-GDP ratio to (49-51) per cent by March 31, 2031,” the report said.