India's government is poised to not only meet but potentially surpass its fiscal deficit target of 4.4% of GDP for the financial year 2025-26 (FY26), according to a leading economic expert. This achievement would serve as a strong positive signal to global investors about the country's commitment to disciplined fiscal management.
Navigating the Revised GDP Growth Figures
The assessment comes despite recent concerns triggered by the National Statistical Office's (NSO) revision of the nominal GDP growth target for FY25. The NSO lowered its projection to 8% from the earlier estimate of 10.1%. Ranen Banerjee, Partner and Leader of Economic Advisory Services at PwC India, clarified that while the growth rate is lower, the absolute size of the nominal GDP remains almost aligned with the budget estimates.
"This means the denominator is not shrinking and the government should easily meet the 4.4 per cent fiscal deficit target," Banerjee stated. He attributed the lower nominal growth to softer wholesale price indices, particularly for food and oil, which have reduced the GDP deflator and narrowed the gap between nominal and real GDP growth.
Revenue Shortfalls and Expenditure Buffers
Banerjee acknowledged that the revised nominal GDP growth is expected to create a shortfall in tax revenues. He estimated a potential gap of Rs 1.9 trillion in gross tax revenues. After accounting for the GST compensation cess, this net shortfall could be around Rs 75,000 crore (Rs 0.75 trillion).
However, the central government is anticipated to have a buffer of approximately Rs 0.5 trillion from unutilised GST compensation cess funds. On the expenditure front, revenue spending is likely to be about 2% lower than budgeted, while capital expenditure is expected to be utilised fully, close to 100% of the allocated amount.
A Path to Exceeding the Target
With these factors in play, the fiscal deficit target remains firmly within reach. The savings on the expenditure side are likely to offset the anticipated shortfall in tax collections. Banerjee expressed optimism that the government might even present a better figure.
"It has a headroom to actually better it. We believe that optically speaking, it could be pegged at 4.3 per cent because it is a kind of signal that we are actually not only meeting the fiscal consolidation targets, but we are overachieving them," he explained. This confidence is bolstered by the government's recent track record, having overachieved its FY25 fiscal deficit target of 4.9% of GDP, bringing it down to 4.8%.
Finance Minister Nirmala Sitharaman, in her last Budget speech, had set the fiscal deficit for FY26 at Rs 15.69 lakh crore, which equates to 4.4% of GDP. The current analysis suggests that the government's fiscal roadmap is on a stable and credible path, reinforcing India's economic resilience to investors worldwide.
