New Delhi [India], January 21 : The Centre is expected to continue its fiscal consolidation efforts in FY26, with a fiscal deficit target of 4.5 per cent of GDP, according to a report by Emkay Research.
For FY25, the report noted that the fiscal deficit is estimated to track close to 4.7 per cent, while states are likely to record a fiscal deficit of 3.2 per cent of GDP.
It said "we do not see the Centre deviating from its consolidation path in FY26, and is likely to target 4.5 per cent GFD/GDP. States, on the other hand, are likely to now hug the 3 per cent of GDP target (+/-0.2 per cent), given that their committed expenditure has become stickier in recent year(s)".
The report noted that the center's fiscal deficit for the first eight months of FY25 (April to November) has been contained at 52 per cent of the full-year target. This has been attributed to slower expenditure growth, which stood at 3.3 per cent compared to the budgeted 8.5 per cent.
The slowdown in capital expenditure (capex) during election years has played a significant role, although revenue collections have remained strong. Robust growth in personal income taxes and non-tax revenues has supported the fiscal position.
For FY25, the report highlighted that certain savings are expected due to lower-than-budgeted spending on defense capex, BSNL recapitalization, and funds for new schemes under the Department of Economic Affairs. These could save around 0.1-0.2 per cent of GDP.
However, higher-than-anticipated revenue expenditure on agriculture, fertilizer subsidies, home affairs, and defense, along with a lower nominal GDP, may offset some of these gains. Adjusting for these factors, the fiscal deficit for FY25 could see a net savings of 0.2-0.3 per cent of GDP.
At the state level, fiscal deficits are expected to deviate by 0.1-0.2 per cent of GDP from the FY25 budget estimates. Rising expenditures on subsidies and freebies, coupled with lower-than-expected revenues, are contributing factors.
While capex levels for states are likely to remain stable compared to FY24, rising committed expendituressuch as salaries and pensionsare putting additional pressure on their budgets.
Looking ahead, the report highlighted that the centre is expected to maintain its fiscal consolidation trajectory in FY26, with states likely to align their deficits around 3 per cent of GDP (+/- 0.2 per cent).
However, states face challenges in mobilizing innovative revenue streams without increasing their financial strain, with committed expenditures now accounting for 55 per cent of their revenue receipts.
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