Budget: India’s fiscal consolidation is well on track despite hurdles
Subscribe to enjoy similar stories. As is usually the case, India’s Union budget for 2025-26, to be announced on 1 February, is expected to attract a lot of attention from different stakeholders in the economy, particularly with its growth momentum having sprung a significant downside surprise in 2024-25.
Has the ongoing cyclical slowdown put the Centre’s fiscal consolidation agenda at risk? We don’t think so. Not only does it remain on track, it has gathered significant momentum in the last few years, with commendable fiscal marksmanship and a particular focus on improving the quality of spending.
Indeed, both the interim budget in February and the post-election budget in July exceeded expectations on the government’s fiscal deficit target, which is praiseworthy. We expect the government to target a fiscal deficit of 4.45% of GDP in 2025-26, down from a likely revised estimate of 4.84% in 2024-25.
According to our estimates, there is scope for the 2024-25 fiscal deficit to end this year lower, as we don’t expect the full capital-expenditure allocation of ₹11.1 trillion to be spent, which will likely result in a lower fiscal deficit than the budget estimate of 4.9%. Once the fiscal deficit has been brought under 4.5% in 2025-26, we expect the government to henceforth focus more on reducing the Centre’s debt-to-GDP ratio over the medium-term.
We do not expect any yearly consolidation target as far as the central government’s debt-to-GDP path is concerned, but the endeavour will likely be to bring the Centre’s debt-to-GDP ratio down to about 50% of GDP by 2030-31 (closer to the pre-pandemic 2018-19 level). If this probable target is achieved over the next five-year period, then it should translate to the Centre’s fiscal
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