In FY25, the fiscal deficit was brought down to 4.8 per cent of GDP, marginally better than the Budget estimate of 4.9 per cent. The Centre has now committed to further consolidation in FY26, even as it maintains a strong push for capital expenditure to support growth
India has made progress in repairing its public finances since the Covid shock, with the Centre more than halving its fiscal deficit over five years and remaining firmly on track to meet its FY26 consolidation target, the Economic Survey 2025-26 said on Thursday.
The Survey noted that the Union government is on course to reduce the fiscal deficit from a pandemic peak of 9.2 per cent of GDP in FY21 to a targeted 4.4 per cent in FY26, underscoring a sustained return to fiscal discipline amid a challenging global environment.
In FY25, the fiscal deficit was brought down to 4.8 per cent of GDP, marginally better than the Budget estimate of 4.9 per cent. The Centre has now committed to further consolidation in FY26, even as it maintains a strong push for capital expenditure to support growth.
Deficit utilisation signals comfort on FY26 glide path
The Survey said fiscal indicators for the current year suggest the Centre is well placed to meet its FY26 targets without slippage. As of November 2025, the government had utilised 62.3 per cent of its budgeted fiscal deficit and 68.2 per cent of the revenue deficit.
“These trends indicate adherence to the announced consolidation path and reflect improved fiscal management,” the Survey said.
The revenue deficit, in particular, has narrowed to its lowest level since FY09, signalling an improvement in the quality of government expenditure and freeing up more resources for productive capital spending.
Credible consolidation supports growth
The Survey emphasised that a predictable and credible fiscal trajectory over recent years has helped anchor macroeconomic stability, even as the government balanced consolidation with the need to sustain growth.
It highlighted that the steady decline in the fiscal deficit from 9.2 per cent of GDP in FY21 to 4.8 per cent in FY25 has coincided with a sharp rise in capital expenditure, improving the long-term growth potential of the economy.
The primary deficit-to-GDP ratio has also fallen sharply, indicating that incremental borrowing is increasingly being used to service interest obligations rather than fund current consumption.
“This places India closer to the post-pandemic consolidation path observed in AEs [advanced economies], underscoring that prudent, growth-friendly fiscal consolidation is achievable under challenging global conditions,” the Survey noted.
Debt anchor over rigid deficit targets
On the fiscal framework, the Economic Survey cautioned against a premature return to a rigid Fiscal Responsibility and Budget Management (FRBM) target of a 3 per cent fiscal deficit, arguing that such a goal has historically proved difficult to sustain.
Since the enactment of the FRBM Act in 2003, India has met the 3 per cent target only once, which, the Survey said, undermined fiscal credibility when repeatedly breached.
Instead, it underscored the importance of the Centre’s new debt anchor, which aims to bring the debt-to-GDP ratio to 50±1 per cent by March 31, 2031. The Survey said this approach offers both credibility and flexibility, particularly in an era marked by global volatility and frequent shocks.
State finances remain a watchpoint
While the Centre’s fiscal position has strengthened, the Survey flagged emerging risks in state finances. The combined fiscal deficit of states has edged up to around 3.2 per cent of GDP in recent years, driven by rising revenue deficits and the growing use of unconditional cash transfer schemes.
Such trends, the Survey warned, could crowd out growth-enhancing expenditure and shape investor perceptions of India’s overall fiscal health.
Still, it added that sustained fiscal discipline at the Centre has helped restore investor confidence, contributing to sovereign rating upgrades by multiple credit rating agencies in FY26, even as the government continues to prioritise capital-led growth.
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