Fiscal consolidation: Public expenditure has become the anchor of India’s growth strategy. Private investment has been hesitant. Government capital expenditure has filled part of the gap. The Union government is now tightening its purse strings. Provisional accounts for FY26 show that spending by 50 of 55 ministries and departments fell short of revised estimates. Total expenditure was Rs 59,690 crore below the revised estimate of Rs 49.65 trillion. The fiscal deficit was contained at Rs 15.19 trillion, or 4.4% of GDP and 97.5% of the revised estimate.
That is not the same as a collapse in government capital expenditure. Capital expenditure still rose to Rs 10.7 trillion in FY26, from Rs 10.18 trillion a year earlier. The issue is more specific. The Centre protected some headline infrastructure spending while compressing expenditure across a wide set of developmental ministries.
READ | State capex slowdown threatens India’s growth prospects
The numbers flatter fiscal discipline. They also reveal the cost of meeting the deficit target.
Fiscal consolidation and government capex
The government’s consolidation path is understandable. Pandemic borrowing had pushed deficits to historic highs. The Union government had promised to bring the fiscal deficit below 4.5% of GDP by FY26. It has done so. Bond markets, rating agencies and investors will welcome that signal. The FY27 Budget also shifts the focus towards debt consolidation, with the fiscal deficit budgeted at 4.3% of GDP.
But the question is not whether consolidation is needed. It is where the restraint has fallen.
Government spending matters more when private consumption and investment are uneven. Capital expenditure on roads, railways, housing, irrigation and urban infrastructure has a stronger multiplier than routine revenue spending. It sustains demand. It creates jobs. It can crowd in private investment.
The FY26 numbers show selective protection of infrastructure priorities. Road transport and highways exceeded its revised estimate. Chemicals and Fertilisers also spent more than planned, largely because of subsidy pressures.
The restraint elsewhere is more revealing.
READ | Capital expenditure efficiency matters more than capex volume
Fiscal deficit target and spending cuts
Among large ministries, Finance spent Rs 39,335 crore less than estimated. Jal Shakti undershot by Rs 19,331 crore. Housing and Urban Affairs spent Rs 6,893 crore less. Education was short by Rs 4,967 crore, Women and Child Development by Rs 4,913 crore, Rural Development by Rs 3,984 crore, and Health and Family Welfare by Rs 3,849 crore.
These are not merely accounting entries. Lower Jal Shakti spending can slow rural water and irrigation projects. Lower urban affairs expenditure can affect urban infrastructure and affordable housing, when cities are already struggling with congestion, pollution and weak public transport.
The social sector cuts look modest against the Union Budget. They matter because India already spends too little on health and education. Public provisioning remains thin. Any cut in these sectors weakens human capital formation.
Rural development is also badly timed. Rural demand has only recently shown signs of recovery after inflation, erratic weather and weak wage growth. The employment guarantee scheme, rural roads and housing programmes support incomes in the countryside. Lower spending will not help consumption in rural India.
Public spending and growth risk
There is a useful distinction between good deficits and bad deficits. Borrowing for productive infrastructure can generate future growth and tax revenue. Persistent borrowing for inefficient subsidies can worsen debt without expanding capacity.
READ | Fiscal federalism: Why long-term capex loans matter now
The policy challenge is to cut waste without cutting growth-enhancing expenditure. The Centre has tried to do this since the pandemic by raising infrastructure allocations and rationalising some subsidies. FY26 shows the limits of that approach. Developmental spending is now also under pressure.
The fiscal story is not only about expenditure. Net tax receipts rose to Rs 33 trillion in FY26 from Rs 30.87 trillion a year earlier. Non-tax revenue rose to Rs 6.8 trillion from Rs 5.31 trillion. Even so, the government relied on expenditure control to meet the deficit target.
There is also a market-confidence argument. India’s borrowing programme is large. Persistent deficits can raise concerns over debt sustainability and inflation. Consolidation strengthens India’s case with ratings agencies that have long flagged public debt. The Centre now aims to reduce outstanding liabilities to around 50% of GDP by March 2031, from an estimated 55.6% in FY27.
But expenditure compression needs a quality test. Some underspending reflects implementation delays. Some reflects lower demand. Some reflects deliberate cash restraint. The economic meaning is different in each case. A ministry failing to spend because a project is stuck is not the same as waste being removed. Nor is a delayed release to a welfare or infrastructure scheme the same as fiscal reform.
This distinction matters for centrally sponsored schemes. If central releases slow, states must either delay projects or borrow more. Several states are already fiscally stretched. The Union’s expenditure compression can therefore transmit fiscal stress downward.
Excessive tightening can also become self-defeating. If growth weakens, tax collections will slow. The fiscal gain then shrinks.
India’s growth ambition requires sustained investment in infrastructure, health, education and social protection. Fiscal consolidation is necessary. It should not become a reason to weaken the spending that supports medium-term growth. The FY26 accounts show discipline. They also show the risk of confusing expenditure control with fiscal strategy.