India's Fiscal Path: Balancing Deficits and Consolidations

India aims to continue fiscal consolidation with a 4.5% GDP deficit target for FY26, while addressing fiscal challenges. In FY25, the fiscal deficit is tracking close to 4.7%, with robust revenue but slower expenditure growth and savings expected from lower defense spending and scheme funds.

In a bid to maintain fiscal health, India is set to pursue a 4.5% GDP fiscal deficit target for FY26, as per a recent Emkay Research report. For FY25, the fiscal deficit is anticipated to align closely with 4.7%, while states may hover around a 3.2% deficit, reflecting ongoing consolidation efforts.

The report suggests that the Indian government is unlikely to deviate from its fiscal consolidation trajectory in FY26, maintaining a 4.5% GDP deficit target. In contrast, state deficits are predicted to narrow towards 3% of GDP, with variations of +/-0.2%, largely due to persistent committed expenditures.

During the current fiscal year, expenditure growth has been sluggish, stagnating at 3.3% against a budgetary allocation of 8.5%. Despite decreased capital spending during election periods, robust tax and non-tax revenue streams have largely mitigated fiscal pressures, underscoring strong revenue collection dynamics.

The report highlights potential budgetary savings in FY25, especially from unspent defense capital allocations, BSNL recapitalization efforts, and unused economic scheme funds, potentially contributing to a GDP saving of 0.1-0.2%. However, increased revenue expenditures on subsidies and a downtrend in nominal GDP could offset these savings.

This fiscal landscape signifies a subtle improvement, offering net savings of up to 0.3% of GDP for FY25. Nevertheless, state fiscal deficits could vary by 0.1-0.2% from expected levels, pressured by subsidy spending and modest revenue streams. Yet the state's capital expenditures are expected to stabilize.

As the Centre remains committed to fiscal discipline in FY26, rising fixed expenses such as salaries and pensions continue to challenge budgets. With committed outlays representing 55% of state revenue receipts, states are urged to explore innovative revenue strategies without exacerbating fiscal tensions. (ANI)

(With inputs from agencies.)