India's Fiscal Deficit Shows Improvement in First Nine Months of FY26
New Delhi: India's fiscal deficit for the period spanning April to December 2025 has been recorded at ₹8.6 trillion, which constitutes 54.5% of the budget estimate for the financial year ending in March. This data, released by the Controller General of Accounts (CGA) on Friday, indicates a positive trend supported by substantial growth in both tax and non-tax revenues.
Moderation in Fiscal Deficit and Revenue Performance
The fiscal deficit at the close of December demonstrates a notable moderation from the ₹9.7 trillion, or 62.3% of the budget estimate, reported at the end of November. Typically, tax revenues experience an uptick as the financial year approaches its conclusion, while expenditure tends to be front-loaded in the initial months, leading to higher deficit figures early on.
During the first nine months of FY26, net tax revenues witnessed a modest increase of 5.2%, whereas non-tax revenues expanded significantly by 20.6%. Revenue expenditure saw a tepid rise of 1.8%, in contrast to capital expenditure (capex), which surged by an impressive 15%.
Detailed Revenue and Expenditure Analysis
The government's gross tax revenues soared by a resounding 32% in December 2025 alone, elevating the year-to-date growth to 9% for the April-December period of the ongoing fiscal year. However, monthly capex compared to the same period last year contracted for the third consecutive month in December 2025, marking a decline of 23% in the third quarter of FY2026. This contraction could potentially impact GDP growth for that quarter.
Despite this monthly dip, capex recorded a healthy year-on-year increase of 15% during April-December of FY26, amounting to 70% of the FY26 budget estimate, up from 65% in the corresponding period of the previous year. The government has allocated ₹11.21 trillion for capital expenditure aimed at asset creation in FY26.
Expert Insights on Fiscal Health
D.K. Srivastava, chief policy advisor at EY India, commented, "According to CGA data for April-December 2025, gross tax revenue growth stands at 8.5%, showing a sharp rise from the 3.3% growth observed from April to November 2025. This sudden acceleration suggests that the fiscal deficit target of 4.4% for FY26 is achievable without necessitating significant cuts in revenue expenditure. This is further bolstered by non-tax revenues, which have already achieved 92.6% of the budget estimates."
Srivastava added, "Capital expenditure growth has moderated to 15% in the April-December 2025 period, aligning closely with the budgeted annual growth of 10.1% over FY25 revised estimates. Consequently, critical parameters such as the fiscal deficit target and the ratio of revenue deficit to fiscal deficit for FY26 are likely to be realized as per budget estimates, with the primary shortfall stemming from a nominal GDP growth of 8.0%, compared to the budgeted growth of 10.1%."
Non-Tax Revenue and Expenditure Savings
A better-than-expected non-tax revenue collection of ₹5.40 trillion, achieving 92.6% of the full-year budget estimate, was recorded in the first nine months of FY26, providing a cushion to the central government's finances. This performance surpasses the 82% of budgeted non-tax revenue collected in the same period last year.
The Centre's fiscal position is reinforced by robust dividend payouts from public sector undertakings, state-run banks, and the Reserve Bank of India. Total dividends received by the Centre during this period amounted to ₹3.50 trillion, exceeding the budget estimate of ₹3.25 trillion by 108%.
Experts indicate that despite modest tax revenue growth up to December, the government may achieve savings on revenue expenditure, as non-interest non-subsidy expenditure declined by 4.7% during the nine months through December 2025. To meet the budget estimates for FY26, expenditure under this head would need to expand by a substantial 38% in the ongoing fourth quarter (January-March).
Aditi Nayar, chief economist at Icra Ltd, noted, "This appears unlikely and could lead to sizeable savings, which would offset the shortfall on the receipts side. A ₹1.5 trillion cut in expenditure on this account would still imply a required growth of 15% during the last three months, which seems relatively reasonable."
Future Fiscal Outlook and Policy Implications
Nayar further elaborated, "Overall, we expect the potential miss on the taxes side to be offset by higher-than-budgeted non-tax revenues and significant expenditure savings on the revenue spending front. As a result, we do not anticipate the FY2026 revised estimates to indicate a higher fiscal deficit than the FY2026 budget estimates."
The expectation that the fiscal deficit may be contained at the budgeted level of 4.4% of GDP during FY26, supported by revenue momentum and expenditure savings, aligns with the government's plan for a calibrated shift towards policies focused on debt sustainability, rather than strict annual deficit targets in the upcoming Union budget.
Madhavi Arora, chief economist at Emkay Global Financial Services, stated, "With debt-to-GDP emerging as the fiscal anchor, only mild consolidation should be required ahead, assuming nominal growth remains stable. This allows policy space to focus on efficiency and productivity-enhancing reforms rather than aggressive expenditure compression."
Arora emphasized that constraints on fiscal headroom will shift the emphasis beyond headline capital expenditure numbers towards improving the quality and productivity of spending. "Capex growth is expected to remain modest, led largely by defence and roads, but the real policy thrust is likely to be on deregulation, factor productivity, and sector-specific ease of doing business, which are critical for raising export competitiveness and moving India up the value chain," she explained.
Projections for FY27 and Market Borrowing
Nayar projected, "Icra expects the Government of India's fiscal deficit to be pegged at 4.3% of GDP in FY27, which would entail a net market borrowing of ₹12.2 trillion, somewhat higher than FY26 levels. This, along with a substantial increase in redemptions, is set to push gross market borrowing sharply to ₹16.9 trillion in FY27 from ₹14.6 trillion in FY26. However, the GoI could pare the gross issuance number by either drawing down cash balances directly or using these to conduct buybacks, resorting to net Treasury-bill issuances, or conducting switches/conversions to reduce redemption pressure in the next fiscal."
