India’s fiscal deficit holds up in H1 FY26 as Centre ramps up public investment

New Delhi: India’s fiscal math is holding steady even as the government aggressively steps up public investment. Despite a 40% surge in capital expenditure (capex) in the first six months of FY26, helped by a low base, the Centre has managed to keep its fiscal deficit comfortably below the halfway mark of the annual target, aided by a windfall dividend payout of ₹2.56 trillion from the Reserve Bank of India (RBI).

India’s fiscal deficit for April-September 2025 stood at ₹5.73 trillion, accounting for just 36.5% of the budget estimate for the current financial year (FY26).

In the first half of the previous fiscal year, the deficit was 29.4% of the budgeted target, largely due to slow government spending as a result of elections. A figure above 50% in H1 of a fiscal indicates stress, and below it, comfort.

What has helped is that despite a 40% jump in capex and a modest 2.8% rise in gross tax collections, the central bank’s dividend payout plugged the gap, sending non-tax collections growth soaring 30.5% y-o-y, reaching 79.94% of the Budget aim during the period.

The Centre’s fiscal deficit target is 4.4% of GDP for 2025-26, as announced by finance minister Nirmala Sitharaman in the Union Budget for FY26, lower than the 4.8% of FY25, and down from a pandemic-era high of 9.3% in 2020–21. Sitharaman has reiterated confidence in meeting the FY26 goal, describing it as part of a broader strategy to sustain post-pandemic growth while reinforcing fiscal discipline.

The Centre appears to be on course. According to the latest budget documents, India’s nominal GDP is projected to rise 10.1% to ₹356.98 trillion in FY26 from ₹324.11 trillion the previous year, translating to a fiscal deficit of 4.4% of GDP, or about ₹15.7 trillion. To be sure, economists have warned of a slower nominal GDP growth of around 8%.

A senior finance ministry official said the government remains confident of maintaining the fiscal trajectory despite external pressures on revenues. “The Centre is working to meet the target for FY26. We have already bettered targets in the last few years amid challenges,” the person said, requesting anonymity.

Receipts and expenditure

The fiscal deficit is the gap between government spending and revenue, and captures how much the Centre must borrow to fund its expenditure.

During April–September 2025, net tax revenue stood at ₹12.30 trillion, or 43.3% of the annual target set in the budget in February, compared with ₹12.65 trillion in the same period last year, data from the comptroller and auditor general (CGA) showed.

Non-tax revenue stood at ₹4.66 trillion in April-September, or 79.9% of the budget estimates. Total revenue receipts stood at ₹16.95 trillion, or 49.6% of the estimates for the fiscal. In the same period last year, non-tax revenue stood at ₹3.57 trillion or 65.5% of the annual budget estimates, while total revenue receipts stood at ₹16.22 trillion, or 51.8% of the estimates for 2024-25.

Meanwhile, total government expenditure during the period was ₹23.03 trillion, or 43.5% of the annual target, against ₹21.11 trillion in the year ago period. Total capex stood at ₹5.8 trillion during the period, or 51.8% of the annual estimate for 2025-26, from ₹4.15 trillion reported during the year-ago period, or 37.3% of the annual estimates for 2024-25.

Economists say improved tax collections in September 2025 (up 7.1% y-o-y after a three-month lull) helped lift revenue receipts to 54.9% of the FY26 target by the end of September, compared with 52.5% a year earlier. Much of this, however, was driven by strong dividend transfers from the Reserve Bank of India (RBI).

“The impact of income tax cuts announced in the budget is gradually correcting, with collections rising 4.7% year-on-year by September after a 2.5% decline in August, though still far below the budgeted 14.4% growth for FY26,” said Paras Jasrai, Associate Director and Economist at India Ratings and Research.

“A loose fiscal policy via cuts in income taxes and GST rate rationalisation aimed at increasing consumption demand and providing support to investment demand (via capex) in the economy at a time of uncertainty is laudable,” he said, adding that the government’s fiscal position is at a crucial juncture with both retail and wholesale inflation at significantly lower levels, impacting tax collections and complicating the fiscal arithmetic.

“Everything hinges on how the GST rate rationalization impacts consumption demand in the economy. The early signs of which (through a strong festive season for durables) are encouraging,” he added.

Unprecedented dividend payout

The Indian government’s tighter fiscal deficit target outlined in February’s annual budget is bolstered by an unprecedented dividend payout from the RBI.

The ₹2.56 trillion disbursement, up from ₹2.11 trillion last year, provides a crucial buffer for 2025-26, offsetting potential shortfalls in tax revenue or hikes in public spending.

This substantial payout aids the government’s adherence to its fiscal consolidation path, with the goal of lowering the deficit to 4.4% from 4.8% by 2025-26.

The path ahead

Looking ahead, India’s fiscal framework will evolve beyond a single-year focus. From FY27 onward, the government plans to align annual deficit targets with a broader strategy to lower the debt-to-GDP ratio to around 50% by 2030–31.

In her FY26 Budget, the finance minister reaffirmed this commitment, setting a medium-term goal of reducing the debt ratio to 50% (plus or minus 1%) as part of a new fiscal consolidation roadmap spanning FY27–FY31.

In recent years, the fiscal deficit has narrowed steadily, from ₹17.87 trillion (5.6% of GDP) in FY24 and ₹16.61 trillion (6.4%) in FY23 to ₹16.13 trillion (4.8%) in FY25. For FY26, the fiscal deficit target is set at ₹15.69 trillion.

For the first half of FY26, the deficit stood at ₹5.73 trillion, or 36.5% of the full-year estimate, an improvement over the 39.3% recorded in the same period of FY24 and 37.3% in FY23.