The Union budget has set a new five-year target to cut the central government’s debt to 50% of gross domestic product, give or take 1%, by 31 March, 2031. The budget, presented by finance minister Nirmala Sitharaman on Saturday, also sought to signal the Narendra Modi administration’s commitment to fiscal prudence and infrastructure creation, including by supporting states.
The budget documents showed that the new goal is to keep fiscal deficit -- the gap between revenue receipts and spending -- in each year from FY27 to FY31 such that the Centre’s debt as a share of GDP reaches this target, down from 57.1% in FY25, provided there are no major exogenous macro-economic shocks.
Department of Economic Affairs secretary Ajay Seth said the Centre’s debt-to-GDP ratio will decline going ahead, depending on the growth of the economy, and what kind of further consolidation measures will be needed. “The roadmap suggests three scenarios, mild, moderate and high fiscal consolidation," Seth said. The highest level of fiscal consolidation can go as low as a debt of 47.5% of GDP, Seth said.
A strong 20% growth in personal income tax collection achieved in FY25 helped Sitharaman offer personal income tax relief under the new tax regime at a cost of ₹1 trillion to the exchequer beginning FY26, and still balance spending and revenue receipts in FY26, both of which are projected to grow at 7.4% annually.
The budget projected nominal GDP growth of 10.1% in FY26, which will take the size of the economy to ₹356.97 trillion or $4.1 trillion, going by an exchange rate of ₹86.7 to the dollar.
The fiscal deficit for FY26 is projected at ₹15.6 trillion or 4.4% of nominal GDP, a notch better than the 4.5% committed earlier. In FY25, the government expects to limit the fiscal deficit to 4.8% of GDP, slightly better than the 4.9% originally estimated.
The Centre will borrow ₹11.5 trillion from the market next fiscal, slightly below the borrowing estimate for the current financial year of ₹11.62 trillion. It will also tap sources like small savings schemes for financing the ₹15.6 trillion fiscal deficit in the coming year.
The budget for FY26 introduces a fiscal stimulus through extra disposable income to the extent of nearly ₹1.03 trillion through forgone direct and indirect taxes, central government’s 10.1% capital expenditure growth, and a facility for state governments to borrow interest-free loans to the extent of ₹1.5 trillion for infrastructure investment, said D.K. Srivastava, chief policy advisor at EY India.
“This stimulus is limited in terms of magnitude, and would prove to be effective along with other fiscal and monetary measures aimed at stimulating private investment. In particular, some realignment of customs duty tariff for making several inputs cheaper through zero or concessional basic customs duties may lead to addition in domestic manufacturing capacity,” said Srivastava.
The Centre’s corporate tax collection is expected to grow 10.4% in FY26 to ₹10.82 trillion, while personal income tax revenue collection is expected to jump 14.4% in the next financial year to ₹14.38 trillion. In spite of the personal income tax relief, the share of direct taxes in overall tax receipts is expected to inch up to 59% in FY26, up from 58% this year.
The Centre's GST (CGST) revenue collection is projected to grow at 11.2% to ₹10.1 trillion in FY26. Excise duty receipts from petrol and diesel is expected to grow at a slower pace of 3.9%, while customs duty collection is expected to grow at 2.2%.
The Centre’s food subsidy bill is expected to inch up to ₹2 trillion in FY26, but petroleum and fertilizer subsidy will remain a notch below this year’s spending. Overall, subsidy bill will stay nearly unchanged at ₹3.83 trillion in FY26 as in the current year.
In addition to the Centre’s capital expenditure of ₹11.21 trillion earmarked for FY26, a 10% jump from the spending being done this fiscal, states will be given ₹1.5 trillion for making capital expenditure next year, as a special assistance.
The Centre’s effective capital expenditure is projected at ₹15.5 trillion in FY26, up from ₹13.18 trillion being spent this year, which is slightly below the original estimate for this year. National polls last year came in the way of the government to spend the earmarked funds fully.
Effective capital expenditure includes spending that is not classified as capital spending, but leads to asset creation, for example, spending under the rural jobs guarantee scheme. It also includes the Centre's assistance to states for building infrastructure.
The fiscal deficit estimates for this year and the next indicate fiscal prudence, said Subodh Dandawate, associate director - regulatory Services at Nexdigm, a business and professional services company.
Tax reforms are meant to offer "equity, certainty, ease and economy," budget documents showed. The taxation system has to be citizen-centric, characterized by simplified tax codes with moderate rates, limited exemptions/loopholes, strict but fair enforcement and reduced litigations, as per the policy goals outlined in budget documents.
“These measures would encourage voluntary compliance by tax payers,” it said.
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