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Informist, Thursday, May 29, 2025

NEW DELHI – India's fiscal consolidation will be driven by moderation in revenue expenditure, according to the RBI's Annual Report for 2024-25 (Apr-Mar). The FY26 Budget pegged revenue expenditure at 11.0% of GDP, against 11.2% the previous year.

The Union Budget for FY26 targeted fiscal deficit of 4.4% of GDP, while revising the target for FY25 by 10 basis points to 4.8% of GDP. In absolute terms, the fiscal deficit for FY26 is estimated at INR 15.69 trillion, compared to the revised estimate of INR 15.70 trillion for FY25. The fiscal deficit for FY25 will be announced by the government on Friday.

"Enhanced tax and non-tax receipts are also expected to support this consolidation," the report said.

In her FY26 Budget speech, Finance Minister Nirmala Sitharaman had said, "Our endeavour will be to keep the fiscal deficit each year such that the central government debt remains on a declining path as a percentage of the GDP." According to the Fiscal Responsibility and Budget Management statement, the government will aim to lower its debt to 49-51% of GDP by March 2031. The central government's debt is seen at 57.1% of GDP in FY25 and 56.1% in FY26.

"Revenue expenditure on pension and other retirement benefits is budgeted to fall by 0.06% of GDP in FY26 as compared to that in FY25. Moreover, grants-in-aid to the states is expected to increase to 1.8% of GDP," the report said.

"The ratio of revenue expenditure to capital outlay continues to remain low at 4.4, reflective of the thrust on the quality of government expenditure...While focusing on rebuilding its fiscal buffers, the Union government has also maintained its expenditure quality by budgeting a robust growth in its capital expenditure in 2025-26," the RBI Annual Report said.

The FY26 Budget projected the central government's capital expenditure at INR 11.21 trillion, up 10.1% from the revised estimate of INR 10.18 trillion for FY25. The Narendra Modi government ramped up capital expenditure in the post-COVID-19 era to revive growth and crowd-in private investment.

The Annual Report also stated that both central and state governments pursued fiscal consolidation in FY25. "The tax receipts of both central and state governments remained robust. On the capital expenditure front, the central government and states recorded modest growth on a year-on-year basis," it said.

The report said for all states and Union territories for which data is available, the consolidated GFD-GDP ratio for FY26 is budgeted at 3.3%. The ratio was 3.6% in FY25 and 3.0% in FY24.

"The gross transfers to states have been budgeted to increase by 12.5% in FY26 from FY25, largely on account of transfers under centrally sponsored schemes and special assistance to states for capital expenditure," the report said.

First launched in the Budget for FY22, the scheme for special assistance to states to carry out capital investment is in line with the Narendra Modi government's thrust on capital expenditure to drive economic growth. In the last five years, the government has increased capital expenditure by more than three times. In FY25, the government ended up releasing just short of INR 1.50 trillion to states for capex loans, much higher than the revised estimate of INR 1.25 trillion and close to the original target set by the government.

On the Centre's FY26 borrowing programme, the report said gross market borrowings, as percentage of GDP, were expected to decline slightly. "Market borrowings, followed by small savings, remain the main sources of financing the gross fiscal deficit." 

The government will borrow INR 14.82 trillion through the sale of dated securities on a gross basis in 2025-26 (Apr-Mar), up from INR 14.01 trillion in FY25. On a net basis, the government will sell bonds worth INR 11.54 trillion, accounting for repayments worth INR 3.28 trillion. The net issuance is lower than INR 11.63 trillion in FY25.

The report said the market borrowings of the central and state governments in FY25 were completed successfully amid global financial volatility and geopolitical tensions. "The market borrowing programme for FY26 will be managed in an orderly manner taking into account the government's fiscal deficit goals and evolving market conditions. The Reserve Bank would continue to ensure smooth conduct of the market borrowing programme based on the guiding principles of cost optimisation, risk mitigation and market development," it said.  End

Reported by Sagar Sen

Edited by Avishek Dutta

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