The Centre has managed to attain the fiscal deficit target of 4.4 per cent of GDP in FY26, despite concerns over lower tax revenue collection. Lower gross tax revenue of around ₹1.9 trillion was offset by a higher dividend transfer by the Reserve Bank of India (RBI) and lower expenditure — mainly revenue expenditure — enabling the government to achieve its fiscal deficit target for the year.
For FY27 as well, the fiscal arithmetic looks achievable. The government has budgeted gross tax revenue growth of 8 per cent, which appears reasonable given projected nominal GDP growth of 10 per cent. The budgeted dividend transfer from the RBI and public sector banks (PSBs) of ₹3.2 trillion in FY27 will help further. The high RBI dividend transfer this year is likely due to RBI’s gain from dollar sales (forex intervention) and higher interest income. Interestingly, the government has kept a high disinvestment, including asset monetisation, target of ₹80,000 crore, against ₹35,000 crore estimated for FY26. For the last three years, the government has been setting a low disinvestment target at around ₹50,000 crore and has still failed to achieve it. Hence, achieving the high disinvestment target for FY27 will be a key monitorable.
On the expenditure side, it is important to note that the focus on capital expenditure (capex) has continued. The Centre has budgeted capex of ₹12.2 trillion for FY27, implying growth of 12 per cent (year-on-year). The total capex (including the Centre’s grant-in aid for capex and central public sector enterprises capex), is impressive at ₹22 trillion, showing a strong jump of 20 per cent (YoY). The total capex (Centre’s capex+ grants for capex+ CPSE capex) to GDP is budgeted to increase to 5.6 per cent in FY27, up from the 5.1-5.2 per cent range in the previous four years. The share of the Centre’s capital expenditure in total expenditure is budgeted to increase to 23 per cent in FY27, compared with an average of 13 per cent in the pre-pandemic period (FY15-19). While the focus on roads and railways has continued, there has also been a sharp increase of 17 per cent in defence spending in FY27. This is on top of a high 16 per cent growth in defence spending in FY26.
The Centre has continued its fiscal consolidation and its move towards better-quality expenditure, but the pace of consolidation has slowed. This provides the government with flexibility to support domestic demand and growth amid global turbulence.
But we need to be wary of a few aspects of India’s government finances:
* India’s general-government debt (Centre + states) to GDP has fallen from 89 per cent in FY21 to 81 per cent in FY25. This is commendable at a time when government debt is rising globally. However, due to higher cost of capital and a narrow revenue base, India’s interest payment burden for the general government (measured as interest to revenue ratio) remains at a high of 24 per cent.
* The Eighth Pay Commission recommendations (effective January 2026) will put pressure on the government finances in FY28, making fiscal consolidation more challenging.
* It will be critical for the government to garner higher revenue from asset monetisation and disinvestment. Also, it would be good to earmark that collection for capex.
* There are signs of stress emerging in some state government finances due to the dole-out of freebies and lower goods and services tax collections. It will be important to encourage prudent spending by state governments to improve overall general-government debt levels.
* As the Centre slows its pace of fiscal consolidation, there will be pressure on the debt market due to high redemptions over the next few years. In FY27, the redemption is at a high of ₹5.5 trillion (as against an average of ₹2.9 trillion in previous five years). Over the next three years, the redemption is likely to remain above ₹6 trillion, shooting up further in FY31. This coupled with higher state government borrowing would put upward pressure on government yields.
To conclude, the path of fiscal consolidation will be challenging in the coming years. The Centre is demonstrating fiscal discipline, but state governments also need to follow suit. The general-government debt to GDP is likely to remain on a downward trajectory, the high levels will nevertheless continue to exert pressure on India’s interest payment burden. The government should not deviate from its long-term objective of fiscal prudence, even as the going gets tough.
The author is chief economist, CareEdge
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