Centre may restrict fiscal deficit to 4.2%-4.3% of GDP, better than FY26 target

A narrow gap in revenue and expenditure will provide the central government with added fiscal space to maintain capital spending to keep the growth engine humming, two people aware of the development told Mint.

While the 2025-26 budget pegs the fiscal deficit at 4.4% of GDP, the actual figure is likely to come in lower, much like in 2024-25, said the first official cited above on the condition of anonymity. “This reflects the government’s commitment to fiscal discipline even as it balances growth imperatives," the person said. 

Also Read: Centre to hold FY26 fiscal deficit at 4.4% despite global headwinds, Pakistan tensions

“Stronger revenue flows will allow room to outperform targets without compromising on capital expenditure," the person added.

The Centre adopted a fiscal consolidation roadmap in 2021-22 to reduce the fiscal deficit to below 4.5% of GDP by 2025-26. India's fiscal deficit stood at 4.8% for 2024-25. 

A higher fiscal deficit raises debt and debt servicing, which strains the economy and risks devaluing the currency and impacting private investments.

A spokesperson of the ministry of finance didn't respond to emailed queries.

Record dividends

In its highest-ever dividend payout, the RBI will transfer a record ₹2.7 trillion in surplus to the Centre for 2025-26, which is even higher than the latest budget's estimates of ₹2.56 trillion in dividends from the central bank and state-run banks combined. 

Also Read: Mint Primer | The 3% fiscal deficit target: Is it sacrosanct?

Announced on 23 May, the unprecedented transfer was driven by robust dollar sales, foreign exchange gains, and a steady rise in interest income.

"The scale of the latest surplus transfer is unprecedented and will play a pivotal role in shaping the fiscal math for 2025-26," the second person mentioned above said on the condition of anonymity.

“Together with robust PSU dividends, it reflects a broader strategy to optimize public sector balance sheets and unlock value for the exchequer," the person added.

The central government expected to earn dividends of ₹2.34 trillion, including the RBI's ₹2.1 trillion, in 2024-25, according to the latest revised estimates.  

The Union government is expected to collect ₹20,000-25,000 crore in dividends from PSU banks for 2024-25, buoyed by record profits and sustained growth, Mint reported on 27 May. 

The upbeat projections follow a record ₹1.78 trillion in combined net profit posted by all 12 public sector banks in 2024-25, up 26% from ₹1.41 trillion a year ago.

State-run banks paid ₹18,000 crore in dividends in 2023-24 and ₹13,804 crore in 2022-23.

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

Meanwhile, dividend payments from public sector undertakings (PSUs) are expected to top ₹80,000 crore for 2025-26, Mint reported on 28 April, underscoring the government’s push to extract higher returns from state-owned companies.

Leading contributors included NTPC Ltd, Power Grid Corp. of India Ltd, Hindustan Zinc Ltd, Nuclear Power Corp. of India Ltd, Coal India Ltd, National Aluminium Co. Ltd (Nalco), and Oil and Natural Gas Corp. Ltd, all of which are expected to anchor payouts again this year.

In 2024-25, dividend receipts from central public sector enterprises (CPSEs) surged to ₹74,016.68 crore, well above the revised estimate of ₹55,000 crore, despite global uncertainties and tepid domestic demand.

Strong earnings across key sectors and a sharper focus on capital efficiency are likely to sustain this momentum.

The anticipated inflow will bolster non-tax revenue and reinforce the Centre’s fiscal consolidation push.

“RBI dividends are market-driven and can’t be consistently high, which is why the government budgets a conservative estimate," said Madan Sabnavis, chief economist at Bank of Baroda.

“Any surplus beyond that is a bonus, reflecting prudent fiscal planning. Reforms, meanwhile, will continue in the normal course," he added.