Indian Fiscal Deficit Target for FY 2025-26

By Dharamraj Dhutia
MUMBAI (Reuters) – The Indian government will target a narrower fiscal deficit of 4.4% of gross domestic product (GDP) for the fiscal year 2025-26, down from a revised 4.8% for the current year, Finance Minister Nirmala Sitharaman announced during the budget presentation on Saturday.

However, the government increased gross borrowing to ₹14.82 trillion ($171.26 billion) from the market to fund the deficit, compared to ₹14.01 trillion in the current year.

The narrower deficit target comes despite changes to personal taxes, which will result in a revenue loss of ₹1 trillion.

The net market borrowing will amount to ₹11.54 trillion, slightly lower than ₹11.63 trillion projected for 2024-25.
The government plans to transition to a debt-to-GDP benchmark for fiscal policy starting in 2026-27, aiming to reduce debt to 50% by March 31, 2031, from the current level of 57.1%.

Importance of the Decision

A narrower budget gap indicates the government’s commitment to fiscal prudence, even as expectations rise for increased capital expenditure to stimulate the slowing domestic economy. A lower fiscal deficit can also enhance foreign investors’ confidence and improves prospects for a sovereign rating upgrade. India’s budget deficit has been declining from over 9% in 2020-21.

The government’s focus on debt-to-GDP aligns with current global perspectives, shifting from rigid annual fiscal targets to more transparent and flexible fiscal standards.

Key Quotes

“The budget has struck the right chord balancing fiscal prudence with supporting the slowdown in private demand. The re-emphasis on fiscal consolidation roadmap over the next few years too remains comforting for the markets,” stated Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank (NSE: KTKM).

Market Reaction

Indian government bond markets are closed on Saturday, but the benchmark 10-year bond yield may rise on Monday as gross borrowing exceeds estimates.

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($1 = ₹86.5360)