16th FC recommends shrinking Union revenue deficit, raising capex

The Sixteenth Finance Commission has proposed a consolidation roadmap that balances development needs with fiscal prudence

The 16th Finance Commission has outlined a path for fiscal consolidation for the Union government, balancing developmental priorities with fiscal prudence. The Commission used the 2025-26 (FY26) Budget Estimates as the base year for its projections and assumed an 11 per cent nominal gross domestic product (GDP) growth from 2026-27 to 2030-31 (FY31).

 

On the revenue side, it recommends that the Union eliminate its revenue deficit. Revenue receipts are projected to rise from ₹34.2 trillion in FY26 to ₹55 trillion in FY31, while revenue expenditure grows from ₹39.4 trillion to ₹54.6 trillion. This would narrow the revenue deficit from ₹5.24 trillion (1.5 per cent of GDP) in the base year to just ₹36,000 crore, yielding a marginal surplus of 0.1 per cent of GDP by FY31.

 

 

“This would restore fiscal balance on the revenue account, with a marked improvement in the quality of Union expenditures,” the Arvind Panagariya-led Commission’s report, tabled in Parliament on Sunday, observed.

 

The Commission projects the effective revenue deficit (revenue deficit minus grants given for capital expenditure, or capex) to fall from 0.3 per cent of GDP in the base year to a surplus of 1.1 per cent of GDP by FY31.

 

Crucially, the Commission recommended that capex by the Centre continue to rise over the award period. It is projected to increase from ₹11.2 trillion (3.1 per cent of GDP) in FY26 to ₹23 trillion (3.8 per cent of GDP) by FY31. Interest-free 50-year loans to states (such as Special Assistance to States for Capital Investment) are projected to rise from ₹1.7 trillion to ₹3.4 trillion.

 

The report notes that, in its memorandum to the Finance Commission submitted in July 2025, the Union government highlighted the need to increase defence expenditure to achieve multi-domain operational capabilities. “We agree with this view and see the need for increased spending on defence on the capital account,” the Commission said.

 

Accordingly, it projects defence capex to grow at 30 per cent annually, rising from ₹1.8 trillion to ₹6.7 trillion in FY31. This would bring total defence expenditure to 1.9 per cent of GDP in the final year of the award period, up from 1.4 per cent in the base year. The Commission cautioned, however, that such increases will require serious structural reforms in long-term planning and procurement.

 

Together, the tightening of the revenue balance and expansion of capex are expected to reduce the fiscal deficit from 4.4 per cent of GDP in FY26 to 3.5 per cent by FY31.

 

With these projections, the Union government’s outstanding debt-to-GDP ratio is expected to decline from 55.1 per cent in FY26 to 49.5 per cent in FY31 — a roughly 7.5 percentage point correction over the award period. The government said these recommendations “will be acted upon in due course”.