Fiscal management has become India’s newest balancing act — one that pits the need to fuel growth through public spending against the imperative to restore discipline to public finances. The pandemic years forced the government to loosen its purse strings, pushing deficits and debt to levels unseen in decades. Now, as growth steadies and inflation moderates, the focus has turned to fiscal consolidation. Yet, the government’s commitment to welfare schemes, subsidies, and ambitious capital expenditure plans makes this a delicate exercise. The question is not whether India should spend or save, but how to do both without derailing either growth momentum or fiscal credibility.
The fiscal arithmetic tells a story of both progress and constraint. The Union Budget for FY26 targets a fiscal deficit of 4.4% of GDP, down from 4.8% in FY25. According to the IMF’s Article IV Consultation, India’s real GDP growth is expected to stay around 6.5% over the next two years, suggesting the government can afford a gradual glide path to fiscal prudence. The general government debt-to-GDP ratio — combining the Centre and states — is currently about 82%, a level that remains higher than peers like Indonesia or the Philippines. The Reserve Bank of India expects this to decline to around 73% by FY31, assuming steady growth and no major shocks.
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Growth vs fiscal prudence
While the numbers indicate intent, the real test lies in sustaining credibility. Fiscal consolidation is not a headline achievement; it is a test of discipline over time. Even as the government cuts the deficit, pressures are building from social schemes, food and fertiliser subsidies, and interest payments. The promise of fiscal prudence is therefore balanced precariously on the assumption of strong revenue growth and efficient spending.
The Centre’s decision to maintain high capital expenditure reflects confidence that public investment can sustain growth momentum. The FY26 Budget allocates ₹11.21 lakh crore, roughly 3.1% of GDP, to infrastructure, railways, and urban projects. The emphasis on capex is justified — public investment often crowds in private activity by improving logistics, housing, and connectivity. However, the argument that capex automatically multiplies growth is not always borne out by experience.
When government borrowing rises sharply, it can raise financing costs and delay private investment decisions. The Centre’s aggressive capex push, while growth-positive, risks crowding out private capital if it relies too heavily on market borrowing. The outcome depends on how efficiently the projects are executed and whether they catalyse private participation. Fiscal prudence cannot be sacrificed at the altar of visible infrastructure. The focus should be on productivity — not just on concrete poured.
States under fiscal strain
The story of India’s public finances is incomplete without the states. They bear much of the burden of welfare spending and infrastructure execution. Yet many are stretched thin. Pension liabilities, pay revisions, and subsidy burdens have eroded fiscal space. Several states also carry significant off-budget liabilities through state-owned enterprises and delayed payments to contractors, masking the true extent of their deficits.
Under the Fiscal Responsibility and Budget Management (FRBM) framework, states are supposed to maintain their deficits below 3% of gross state domestic product (GSDP). Few manage to do so consistently. In a post-pandemic environment, states’ revenue streams have not recovered evenly, especially those dependent on GST compensation. This divergence risks widening regional inequality and undermines national fiscal consolidation. A stable fiscal framework for India must therefore include credible limits and transparency mechanisms for states, not just the Centre.
Tax buoyancy and reform imperatives
On the revenue side, optimism abounds but structural weaknesses remain. The FY26 Budget projects 10.8% growth in tax revenues, including 10.9% growth in GST collections. These are credible but ambitious assumptions in a slowing global environment. The direct tax base remains narrow, and while GST compliance has improved, its buoyancy fluctuates with commodity cycles and enforcement intensity.
The tax system needs rationalisation on multiple fronts. Simplifying exemptions, broadening the base, and plugging compliance gaps would yield more predictable revenues. Yet the real test lies in political will — reducing subsidies and non-merit transfers is never popular. Subsidies on food, fertiliser, and fuel still consume a large share of spending, often with limited efficiency. Without reforming these structural leakages, India’s fiscal arithmetic will remain vulnerable to shocks.
The early months of FY26 have already shown warning signs. The fiscal deficit touched nearly 30% of the annual target by July, suggesting that both revenue inflows and expenditure control need sharper monitoring. Fiscal credibility cannot rely solely on optimistic forecasts.
Need a rule-based fiscal framework
India’s fiscal challenge cannot be solved through headline targets alone. The government must adopt a rule-based fiscal framework that allows counter-cyclical flexibility — permitting higher deficits in downturns while enforcing discipline during good years. This would replace discretion with predictability and improve investor confidence.
The next phase of fiscal reform must also embed state-level accountability. Transparent reporting of off-budget borrowings, time-bound settlement of dues, and better coordination between the Centre and states are essential. Without this, the combined deficit of India’s public sector could remain far above the official figures.
Equally important is the quality of spending. The focus must shift from input-based budgeting to outcome-based evaluation. This means measuring whether spending translates into measurable economic gains — more productive employment, improved logistics, or faster urbanisation. Asset monetisation and public-private partnerships (PPPs) can reduce fiscal pressure while maintaining investment momentum, but they need robust governance and risk-sharing frameworks.
Revenue reforms, too, must go beyond rate tinkering. A wider direct tax base, rationalised GST structure, and predictable taxation of the digital economy are crucial for long-term fiscal stability. Without reform, India risks returning to a pattern of short-term fixes — fiscal slippage followed by abrupt tightening — which disrupts investment planning and macroeconomic stability.
The long road to fiscal maturity
India’s fiscal story is one of ambition tempered by constraint. The Centre’s plan to bring the deficit down to 4.4% of GDP reflects commitment to discipline, yet the competing demand for growth stimulus remains. The way forward lies in steady, credible reform — not in austerity or indiscriminate spending.
True fiscal consolidation will come from predictability: stable revenues, efficient expenditure, and disciplined borrowing. India must institutionalise this predictability through transparent rules, credible data, and cooperative federalism. Only then can the country sustain growth while gradually reducing its debt burden.
Balancing stimulus and consolidation is less about arithmetic and more about trust — trust that policymakers will stay the course, that data will remain credible, and that reforms will outlast electoral cycles. That is the test of fiscal maturity.