Centre may target fiscal deficit range of 3.7-4.3% post FY26

Fiscal deficit refers to the shortfall between a government's income and expenditure, and is expressed as a percentage of gross domestic product or GDP.

“For 2025-26, the plan is to keep the fiscal deficit below 4.5%," the first person mentioned above said. "Subsequently, we will keep it on a declining path, but will take a range-bound view of the deficit and focus more on reducing the country’s indebtedness."

The person added that while it does not mean the deficit will reach 3% soon, the range-bound approach will provide flexibility.

“This issue has been discussed in the past; instead of an assigned number, it (the fiscal deficit target) can become a range," the second person mentioned above said, adding that India's debt-to-GDP ratio has been falling year after year, and the GDP is also growing at a faster pace.

"But instead of saying so much debt-to-GDP will be brought down next year, the Centre can take, say, a more flexible approach to managing the year's activities, as long as it is adhering to the fiscal path," the second person said.

The fiscal deficit target of 4.5% for 2025-26 is as per the fiscal consolidation glide path projected by finance minister Nirmala Sitharaman in 2021-22. That year, the covid-19 pandemic propelled a sharp rise in government spending in an effort to shore up the stumbling economy and help vulnerable sections, taking the deficit up to 9.1% from the original target of 3.5%.

To be sure, the fiscal deficit as per the N.K. Singh committee should have been 2.5% by FY23 (before covid-19 hit). It had also said that any overriding considerations can relax fiscal deficit by 0.5% of GDP.

In that light, the government's post-FY26 fiscal deficit target is 1.2-1.8 percentage points higher than the target level set by the FRBM (fiscal responsibility and budget management) Act.

A finance ministry spokesperson didn't respond to emailed queries.

Focus on debt

"The Centre can reduce its debt (to GDP) by 0.5-1% every year, rapidly bringing it down to 50% (of GDP). However, we don't want to constrain growth. We will be on a declining path as far as fiscal deficit is concerned," said the first person mentioned above. “At that level, further compression of the deficit may affect growth, so we have to make the trade-off carefully."

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Expert views

Experts said the Centre could look to stabilise the fiscal deficit at 4% after 2025-26, by targeting a range of 3.7%-4.3%.

“With the underlying nominal GDP growth remaining stable at about 11% per annum, this would imply a combination of 7% real growth and about 3.7% implicit price deflator (IPD)-based inflation," said D.K. Srivastava, chief policy advisor, EY India, adding that at this level of nominal GDP growth, the debt-to-GDP ratio would stabilise at about 40%, in line with the 2018 FRBM amendment.

“However, the states are likely to continue to maintain a fiscal deficit-to-GDP target of 3%," added Srivastava. “They have also not changed their fiscal deficit target in their fiscal responsibility legislations (FRLs). Accordingly, states’ debt-GDP ratio would stabilise at 30%. "

According to Srivastava, the combined debt-GDP ratio of the Centre and the states would settle at 70%, in violation of the 60% target of the 2018 amendment to the Centre’s FRBM. “The combined fiscal deficit-to-GDP ratio would be maintained annually at 7% rather than 6%," he said.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is an Act of the Parliament of India to institutionalise financial discipline, reduce India's fiscal deficit, improve macroeconomic management and the overall management of public funds by moving towards a balanced budget and strengthen fiscal prudence.

The 2018 amendment to the FRBM Act incorporated the concept of “general government debt" consisting of both central and state government debt and fixed a target of containing general government debt to 60% of GDP by the end of the financial year 2024-25.

Meanwhile, even as the fiscal deficit has fallen annually since FY22, when it stood at 6.8%, the Centre has also bettered its targets in the past two years, from 5.8% (revised estimates) to 5.6% in FY24, and from 5.1% to 4.9% in FY25.