Budget should support growth with fiscal consolidation

The nominal GDP magnitude for 2025-26 is estimated at ₹357.14 lakh crore. Applying a nominal growth of 9.5% would provide a figure of ₹391.1 lakh crore for 2026-27.

Revised revenue estimates for 2025-26

For the period April to November 2025-26, the Centre’s gross tax revenues (GTR) have shown a growth of only 3.3% vis-à-vis the budgeted full-year growth of 10.8%, according to the Controller General of Accounts data. In the remaining four months, the GTR growth may improve, but it would still fall short of the budgeted growth. The revenue impact of the recent Goods and Services Tax (GST) reforms was not included in the 2025-26 budget estimates. Any shortfall in the GTR may be counterbalanced partially by the two newly introduced measures relating to the central excise tax on tobacco and tobacco products and the Health Security and National Security Cess. There would also be some revenue cushion from the Reserve Bank of India’s (RBI) higher dividends. It may be possible to meet the budgeted fiscal deficit target of 4.4% of GDP with some cuts in revenue expenditures, which have grown only by 1.8% during the first eight months of 2025-26. This will not affect the budgeted expenditures in real terms because of lower inflation.

Scope for consolidation in FY27

In the 2025-26 budget, the Centre had announced its intention to focus only on an annual reduction in the debt-GDP ratio as the fiscal consolidation target. However, debt is an outcome of fiscal deficit, which remains a meaningful operational target. Reducing the fiscal deficit-to-GDP ratio to 4.0% in 2026-27, implying a 40 basis points fall, the magnitude of the 2026-27 fiscal deficit can be estimated at ₹15.83 lakh crore. This appears possible. The medium-term fiscal consolidation path should clearly indicate the year by which the debt-GDP ratio would be brought down to the level specified in the Centre’s Fiscal Responsibility and Budget Management Act (FRBMA) and the corresponding annual fiscal deficit reduction path. In our view, the path of fiscal deficit provides a more transparent picture of fiscal consolidation. The fiscal deficit brings out clearly the extent of available investible resources that the government is drawing upon. In fact, the net financial saving of households as a ratio of GDP is declining. To facilitate private investment, the government should draw less from available investible resources.

With respect to the broad fiscal aggregates, we estimate the Centre’s gross tax revenues at ₹43.9 lakh crore for 2026-27, assuming a buoyancy of 1. Correspondingly, net tax revenues are estimated at ₹29.2 lakh crore. Non-tax revenues and non-debt capital receipts may be assumed to grow at the nominal GDP growth rate. Their 2026-27 levels are estimated at ₹7.2 lakh crore and ₹0.8 lakh crore, respectively. Thus, together, non-debt resources amounting to ₹37.1 lakh crore would become available. Given these magnitudes, to accommodate a reduction in fiscal deficit of 0.4% points of GDP, the revenue expenditure-to-GDP ratio will need to be adjusted downwards from 10.7% in 2025-26(RE) to 10.3%, while increasing the capital expenditure-to-GDP ratio by 0.1% points. Under the employment guarantee scheme, the central government may also spend less because 40% of expenditure has to be borne by state governments.

Consumption and investment prospects

The real gross fixed capital formation-to-GDP ratio has remained at about 33.6% on average during 2022-23 to 2024-25. In 2025-26, it marginally increased to 33.8%, as per the first advance estimates. With extensive GST rate reductions and a sustained reduction in the repo rate, there has been policy support for consumption expenditure growth. This may also result in private investment picking up, but possibly with a lag. Investment sentiments may improve after global supply bottlenecks ease and global growth picks up. For the time being, the Centre should continue to support growth by maintaining its capex growth momentum. There is now a need to explore why private investment has not shown signs of any significant pickup yet. This would facilitate more sectoral-level interventions in the upcoming budget.

C. Rangarajan is chairman, Madras School of Economics, and was formerly governor of the Reserve Bank of India and chairman of the Economic Advisory Council to the Prime Minister. D.K. Srivastava is a member of the advisory council to the Sixteenth Finance Commission and formerly director, Madras School of Economics. The views expressed are personal.