Budget 2026: Fiscal Deficit Target Achieved Amid Revenue Challenges
In the lead-up to the Union Budget 2026, there was widespread speculation that the government might struggle to meet its fiscal deficit targets for the current year. Concerns were primarily driven by anticipated shortfalls in expected tax revenues, which threatened to derail economic projections. However, the revised estimates for the fiscal year 2025-26 present a surprising turn of events: the target of maintaining the fiscal deficit at 4.4% of GDP appears likely to be achieved, defying earlier pessimistic forecasts.
How the Government Bridged the Revenue Gap
The achievement of this fiscal target was not without significant adjustments. The short answer lies in a combination of higher-than-budgeted non-tax revenues and, more critically, substantial cuts in government expenditure. Specifically, capital expenditure—which funds investments in future assets like infrastructure—bore the brunt of these reductions, raising questions about long-term economic growth implications.
Tax revenues had been initially budgeted at an ambitious Rs 28.4 lakh crore but are now estimated to reach only Rs 26.7 lakh crore. This represents a shortfall of over Rs 1.6 lakh crore, highlighting the challenges in revenue collection. A detailed breakdown reveals mixed performance across tax categories:
- Corporate income taxes slightly exceeded expectations, providing a minor boost.
- Personal income taxes fell significantly short, with revised estimates at Rs 13.1 lakh crore against a budgeted Rs 14.3 lakh crore.
- Excise and customs duties collections were higher than planned, offering some relief.
- GST revenues declined sharply from Rs 11.8 lakh crore in the budget estimate to Rs 10.5 lakh crore in the revised estimate.
Non-Tax Revenues and Expenditure Cuts to the Rescue
To counterbalance the tax revenue decline, non-tax revenues are now projected to reach Rs 6.7 lakh crore, up from the budgeted Rs 5.8 lakh crore. This increase, primarily from higher dividends and profits—notably from the Reserve Bank of India—narrowed the fiscal gap. Non-tax revenues rose to Rs 3.8 lakh crore against an anticipated Rs 3.3 lakh crore, providing crucial support.
However, the most impactful adjustment came from expenditure cuts. Total government spending was reduced from Rs 50.7 lakh crore in the budget estimate to Rs 49.7 lakh crore in the revised estimate. Capital expenditure faced a notable cut, with the Centre's spending on this account estimated to be about Rs 30,000 crore lower than the budgeted Rs 11.2 lakh crore.
An even steeper reduction occurred in grants-in-aid to states for capital asset creation, which plummeted from Rs 4.3 lakh crore to Rs 3.1 lakh crore. Consequently, effective capital expenditure—combining the Centre's own spending and state grants—dropped sharply from nearly Rs 15.5 lakh crore to just over Rs 14 lakh crore. As a share of GDP, this figure decreased from 4.2% in 2023-24 to 3.9% in the revised estimates for 2025-26.
Implications for Economic Quality and Future Projections
While the headline deficit figure remains unchanged from initial plans, the quality of expenditure has deteriorated markedly. The reliance on spending cuts, especially in capital investments, suggests a trade-off between fiscal discipline and growth-oriented spending. This shift may explain why the budget estimates for 2026-27 project modest growth of under 8% in both tax revenues and total expenditure, despite an assumed 10% rise in nominal GDP.
Interestingly, effective capital expenditure is slated to increase by over 22% in the coming year. Past experiences indicate that such a rebound could be challenging to achieve, raising doubts about the feasibility of these projections. The current scenario underscores the delicate balance between maintaining fiscal targets and fostering sustainable economic development through strategic investments.
