
Budget 2025 math: How the government plans to cut fiscal deficit this year

Summary
The Centre has cut its fiscal deficit target for 2025-26 to 4.4% of gross domestic product (GDP). Here's how it plans to achieve this number and what lies ahead.NEW DELHI : Union finance minister Nirmala Sitharaman pegged the fiscal deficit target for 2025-26 at 4.4% of gross domestic product (GDP), down from 2024-25's 4.8%. This marks the conclusion of a crucial post-pandemic fiscal consolidation period that began with the Union Budget 2021-22. when the Centre committed to reducing the fiscal deficit to below 4.5% of GDP by FY26.
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The fiscal deficit cut is mainly on account of the 40 basis point reduction in expenditure and 10 basis point increase in receipts, which is a reflection of the government’s ongoing effort to strike the fiscal balance amid the challenges in the economy. One basis point is one-hundredth of one percentage point.
After reaching a high of 9.16% in 2020-21 due to the pandemic-led expenditure and cleaning of the books related to the food subsidy, fiscal deficit as a percentage of GDP has consistently declined. However, a lower fiscal deficit has been achieved mainly by cutting expenditure, while revenue mobilization has hardly improved.
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While the government’s effort to keep its finances in check will be appreciated, a slowdown in the economy may warrant more support from government spending. After raising capital expenditure from 1.6% of GDP in 2018-19 to 3.4% of GDP in the Union Budget 2024-25, the government has chosen a less ambitious aim for the next fiscal year.
This may pose a challenge for the economy, which is expected to grow 6.3-6.8% in FY26, according to the Economic Survey 2024-25 presented on Friday. In the current fiscal year, GDP growth is expected to be 6.4%. Although the budget 2025 has projected a slightly optimistic nominal GDP growth of 10.1%, which will be 40 basis points higher than the growth estimated for 2024-25, possibly expecting some boost from the massive income tax cuts.
In her budget speech, Sitharaman gave massive tax relief to the “middle class" and announced that there would be no income tax payable up to an income of ₹12 lakh under the new regime. In addition, tax slabs and rates were changed significantly across the board to benefit all taxpayers.
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