India's government is navigating a tightrope walk to maintain its medium-term fiscal strategy, aiming to reduce the central government's debt to 50% of GDP by FY31. Despite facing macroeconomic headwinds, senior officials express confidence that fiscal discipline built in recent years will keep the consolidation path on track.
Windfall Gains and Deficit Targets
Officials, speaking anonymously to Mint, indicated the Centre expects to close the 2025-26 fiscal year with a deficit of about 4.3% of GDP, slightly better than the budgeted target of 4.4%. This optimism is fueled by a significant revenue windfall. The Reserve Bank of India's (RBI) record surplus transfer of ₹2.69 trillion for FY25, along with robust dividends from public-sector financial institutions, has provided an unexpected cushion.
The FY26 Budget had projected ₹2.56 trillion from these sources, but receipts are now set to exceed that estimate. A State Bank of India report suggested this windfall could lower the FY26 fiscal deficit by 20-30 basis points. For FY27, the deficit is likely to be limited to 4.1-4.2%, aligning with the glide path towards the FY31 goal.
The Tightening Arithmetic and Rising Pressures
Despite the windfall, the fiscal math remains constrained. Data shows the fiscal deficit for April-October FY26 stood at ₹8.25 trillion, or 52.6% of the annual target, higher than the 46.5% recorded in the same period last year. Experts warn the path for consolidation has narrowed.
Nominal GDP growth, a critical factor for debt ratio calculations, averaged 8.8% in the first half of FY26, below the 10.1% projected in the budget. D.K. Srivastava of EY India noted that while a higher GDP base for FY25 offers temporary relief, sustained lower inflation could mean nominal growth of only 8-8.5% going forward, squeezing the fiscal space.
Expenditure pressures are mounting simultaneously. The food subsidy bill for FY26 may exceed the budgeted ₹2.03 trillion by 10-15%, driven by the cost of providing free grains to 810 million people. Experts like Rishi Shah of Grant Thornton Bharat warn that rising subsidies, infrastructure costs, and global volatility create genuine expenditure tensions that targets alone cannot resolve.
Pockets of Optimism: Consumption and Private Capex
Amid the constraints, economists point to emerging signs of economic resilience that could support revenue. The economy grew at a surprising 8.2% in the July-September quarter of FY26, with private consumption expenditure rising to 7.9%. Early signs of a pickup in private capital expenditure, particularly in chemicals, logistics, and electronic machinery, are also noted.
Debopam Chaudhuri of Piramal Enterprises Ltd. believes FY26 is shaping up to be a private-sector-led growth story, with urban consumption expected to strengthen meaningfully in the second half. The recent GST rate rationalization is also anticipated to boost consumption. Rumki Majumdar of Deloitte India suggests the government is betting on a virtuous cycle of rising demand and improved tax compliance to offset revenue pressures and strengthen economic resilience.
However, the overarching challenge remains. The government's debt stood at 57.1% of GDP in FY25, and achieving the 50% target by FY31 requires navigating a narrow path where any additional spending could delay the already diluted Fiscal Responsibility and Budget Management Act goals.
