Budget Focuses On Fiscal Prudence, Growth Through Reforms

Fiscal prudence with reforms to revive domestic growth engines appears to be the core theme of the Union Budget 2025-26.  As was elaborated by the Economic Survey, and especially with an unfavourable external environment, the Budget rightly focusses more on stimulating domestic growth levers through deregulation and few reforms initiatives.  But what makes this Budget remarkable is the way it balances the fiscal pressures and growth impetus.  

On the fiscal side, the Budget manages the headline numbers much better than anticipated. The fiscal deficit for 2024-25 was kept within 4.8% (revised estimate) compared to 4.9% (budget estimate) despite lower-than-expected GDP growth numbers. For 2025-26, the fiscal deficit is projected to be further lower at 4.4%.

However, compared to 2024-25, the numbers suggest an improved quality of expenditure with a lower revenue deficit while retaining the government capital expenditure at the same level as that of 2024-25, i.e., at 3%. In terms of effective capital expenditure, 2025-26 is projected to have a larger number of 4.3% compared to 3.8% in 2024-25. This shift in the quality of expenditure between the two years ensures better growth in 2025-26 compared to 2024-25.

For the same reason, the assumption of 10.1% nominal GDP growth for 2025-26 against 9.7% in 2024-25 seems on the lower side, although this had been the hallmark of the last few Budgets—fix the target lower but strive to achieve higher.

Within the fiscal deficit, although in 2024-25 there is a shortfall of over ₹1 trillion mostly due to general elections and a few state elections, the Budget allocated ₹11.21 trillion in 2025-26. This includes an expanded allocation of ₹1.5 trillion to states, up from ₹1.3 trillion in 2024-25. With grants for the creation of capital assets, the effective capital expenditure is expected to increase to 4.3% (3.8% in 2024-25), and if realised fully, this should work as a strong stimulus with real GDP growth potentially reaching the higher side of 6.3% to 6.8% as predicted by the Economic Survey.

This time around, the Budget provides stimulus not only through expenditure but also through the tax route. With an increase in the tax slab to ₹1.2 million and a subsequent increase in disposable incomes of the salaried middle class, it should act as a stimulus through private consumption to the extent of over ₹1 trillion.

With the income tax multiplier of -1.01, although a slightly dated estimate, one should expects GDP to increase by a little over the tax revenue foregone. However, with both tax and capital expenditure stimulus being implemented together, the growth impact should be substantially higher than that suggested by the partial tax and expenditure multipliers.

On the revenue side, again, the Budget makes conservative estimates by assuming a lower tax revenue buoyancy of 1.07. Even the income tax buoyancy is assumed at 1.3, although the average buoyancy in the recent period is 1.74. However, despite these lower buoyancy assumptions, the gross tax revenue growth rate is at 10.8%, higher than the growth of total expenditures, which is pegged at 7.4%, thus resulting in a lower budget deficit. This is despite the expected foregone revenue to the extent of ₹1 trillion due to the hike in the tax slab.

One concern on the revenue side is the risk regarding the realisation of the disinvestment target, although it is pegged at ₹470 billion, lower than ₹330 billion in the revised estimate for 2024-25. The Finance Minister also talked about the second Asset Monetisation Plan to plough back ₹10 trillion over five years (about ₹2 trillion each year). If realised, it would give a big boost to public investments in long-term projects.

On the expenditure side, a couple of concerns need attention. While revenue expenditure as a ratio to GDP is expected to decline to 11% from 11.4% in 2024-25, the rise in interest payments appears to be a concern. It increases from 23.9% in 2023-24 to 25.2% of total expenditure in 2025-26, with a secular increase in this ratio over the last five years.

Such trends have implications for debt management in the long run. In terms of capital expenditure, as discussed earlier, there ihas been significant increase leading to improved quality of expenditures in the last three years, and in 2025-26 it is expected to improve further. The ratio of capital expenditure to fiscal deficit is projected to increase from 64.9% in the revised estimate for 2024-25 to 71.5% in the budget estimate for 2025-26. Considering effective capital expenditure,, and adjusting for grants for asset creation, the ratio would be much higher—98.7% in the budget estimate for 2025-26 compared to 84% in 2024-25. This has been a major factor in India achieving decent GDP growth and maintaining stability despite heavy global headwinds.

With the Budget’s new macro-fiscal framework, markets must carefully look at Annexure-1 in the Fiscal Responsibility and Budget Management Statement report, which provides the fiscal consolidation path for the next five years, i.e., from 2026-27 to 2030-31—the 16th Finance Commission award period.

As announced in the 2024-25 Budget, the Finance Minister rightly chose the debt-to-GDP ratio as the fiscal anchor instead of the fiscal deficit. The Budget argued in favour of debt as an anchor with some interesting numbers. Given that the government had promoted fiscal transparency that led to the disclosure of off-budget borrowings, the trend in the ratio of change in liabilities to the fiscal deficit is almost close to one, especially since 2020-21. Thus, anchoring debt instead of the fiscal deficit is appropriate.

In the end, the Budget document also presents various nominal GDP growth scenarios under which the debt can be brought down, suggesting a targeted debt-to-GDP level between 49% and 51% by the end of 2030-31, down from 57.1% in 2024-25. The main concern is that these scenarios, though one can derive fiscal deficit numbers, did not suggest the right mix of capital expenditure and revenue deficit (and hence fiscal deficit) and its feedback impact on nominal GDP growth. A further concern is the distribution of nominal GDP growth between real GDP growth and inflation. It is hoped that these issues will be considered while preparing for the debt path.
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