“Fiscal consolidation in the last three years has come through without sacrificing growth objectives. However, the economic momentum loss and nominal GDP growth going down to single digits for an extended period can create a much bigger trade-off between growth and fiscal consolidation, going forward,” notes a BoFA Global Research report dated January 16.
In the previous budget announced in July, on way to achieving its FY26 fiscal deficit goal of 4.5 percent of the GDP, the government did announce sops for women, farmers, and the youth to spur an inclusive and investment-led growth cycle. But what shone through was the solid path to fiscal consolidation: FM Sitharaman lowered the FY25 fiscal deficit estimate to 4.9 percent from 5.1 percent projected in the Interim Budget in February. It aims to bring down the fiscal gap to 4.5 percent in FY26.
UBS India believes the fiscal deficit target could marginally improve to 4.8 percent versus the budget estimate of 4.9 percent in FY25 on account of slower than budgeted capex. On the revenue side, its economists expect gross tax revenue collection to grow at 11.5-12 percent in FY26 in comparison to 10.7 percent so far in the current fiscal.
“Overall, we expect government capital spending to pick up next year which coupled with shallow monetary easing should help support real GDP growth of 6.3 percent in FY26,” UBS India’s economists said.
Last year the Modi government had pegged receipts and expenditure for FY25 at Rs32.07 lakh crore and Rs48.21 lakh crore respectively. It had announced a revised estimate of gross market borrowing at Rs14.01 lakh crore-marginally lower than the Rs14.13 lakh crore it had projected in the Interim Budget. The shift in the Centre’s borrowing plan also reiterated its focus upon fiscal prudence.
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In fact, a large chunk of the expenditure outlay was allocated for building infrastructure such as roads and houses. Most importantly, the clear message from the Modi government has been its unwavering commitment towards fiscal prudence. Hopefully, this will give global rating agencies the comfort to upgrade their low ratings for the world’s fastest growing major economy which has remained unchanged for 15 years despite India’s economic progress.
Also, the government is likely to signal a new medium-term fiscal roadmap from FY27. This will be linked to reductions in government debt and will allow flexibility to frame the fiscal trajectory.
“We do not expect the next leg of fiscal targets to be unveiled in this budget but expect them to be provided next year once the existing targets are achieved at 4.5 percent. This is primarily because of the lower pace of capital spending in the current year,” Rahul Bajoria, BoFA Securities’ India and ASEAN Economist says in the report mentioned earlier. “It is likely to help offset any shortfall on the receipts side leading to fiscal deficit reaching 4.9 percent of GDP in FY25, despite undershooting the nominal GDP projections.”
Indirect taxes, led by GST, have seen a strong growth over the past three years. But GST collections in the current fiscal year have lost momentum, showing lacklustre discretionary spending. Unless consumption picks up meaningfully, GST collections growth is likely to settle around a mid-single digit mark. On customs duty, economists are expecting more cuts in the next fiscal year to boost trade. Union excise duties are likely to grow at high single digits, excluding any hike in fuel tax.
RBI dividend transfers have been a major game changer for government finances. The central bank paid a dividend of Rs2.1 lakh crore to the government in FY25 even as its capital adequacy ratio rose to 6.5 percent of its balance sheet. Bank of America estimates RBI dividend transfers to the tune of Rs2.4 lakh crore for FY26.
“With no more room to increase capital provisioning, and FX intervention increasing returns, we believe RBI is broadly on track to announce another high dividend transfer for FY26, given its ongoing increase in investment returns, as well as gains from foreign exchange intervention,” Bajoria adds.
Although the government wants to revive the economy it does not want to stray from the fiscal path. Overall, the centre has shown restraint in spending on subsidies and populist measures during the election season. The downward trend in spending on these items has been further supported by lower global crude oil prices and fertilisers.
“From the current juncture, while subsidies are unlikely to decline materially, on average lower crude oil prices, along with some moderation in food inflation can provide some wiggle room. Still, we do not expect any material rationalization on subsidies, and if anything, they can be earmarked for a marginal rise”, Bajoria states.
Against a volatile global backdrop, marked with concerns of inflationary tariffs and potential supply chain disruptions, the government will focus on measures to push local manufacturing and employment to improve competitiveness of domestic companies on the global stage.
Union Finance Minister Nirmala Sitharaman.