Fiscal Deficit Projected at 4.8% of GDP for FY25, 4.4% for FY26: FM

The report states that the government will aim to reduce the fiscal deficit to 4.5 percent of Gross Domestic Product (GDP) in the Financial Year 2026 (FY26), down from an estimated 4.8 percent in FY25.

The Government will focus on fiscal consolidation and growth in the Union Budget, according to a research report by the Union Bank of India.

The report states that the government will aim to reduce the fiscal deficit to 4.5 percent of Gross Domestic Product (GDP) in the Financial Year 2026 (FY26), down from an estimated 4.8 percent in FY25.

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"We expect the absolute fiscal deficit to increase from the Revised Estimate (RE) of ₹15.7 lakh crore to ₹16.2 lakh crore in FY26," added the report.

The fiscal target is in line with the government's roadmap for achieving macroeconomic stability and ensuring manageable public debt dynamics.

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The government is likely to stay on its fiscal consolidation path, with the fiscal deficit set to decline steadily over the next few years. This is part of a broader effort to contain inflationary pressures, manage the cost of borrowing, and maintain investor confidence as the economy slows down.

The fiscal deficit has been under pressure in FY25 due to lower-than-expected capital expenditure (capex) and rising subsidy burdens due to geopolitical reasons.

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The report points out that government spending on infrastructure lags behind budgeted targets. However, it is expected to exceed the fiscal consolidation target mainly because of a reduction in expenditure as a percentage of GDP, rather than a strong pickup in revenue growth.

The fiscal deficit target of 4.5 percent of GDP for FY26 is a step that should mark a significant milestone on the path to more sustainable fiscal adjustment in the aftermath of the pandemic-fueled spending boom.

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The UBI report observes that this fiscal tightening might be offset with targeted reforms aimed at stimulating growth, including tax cuts, a capex boost, and incentives for sectors of the economy. The government has been pushing to achieve fiscal discipline, which did not sit very well with critics who were already clamoring for more aggressive stimuli to boost an economy that has slowed down.

Still, the report is likely to reflect the government's continued commitment to fiscal prudence, even as it balances growth-boosting measures in the next Union Budget.

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As the government prepares for the Budget and the Reserve Bank of India's monetary policy decisions in the coming weeks, the UBI report underlines that the next steps will be critical in determining the trajectory of India's economic recovery and its ability to manage fiscal health while supporting growth.

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