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

The Centre aims to achieve the fiscal deficit target of 4.4% of gross domestic product (GDP) in FY26 despite uncertainties, two people aware of the discussions said. India’s fiscal deficit in FY25 stood at 4.8% of GDP under revised estimates.

The Union budget had set a non-tax revenue target of ₹5.83 trillion— ₹47,738 crore from interest receipts, ₹3.25 trillion from dividends and profits comprising contributions from the central bank, state-run banks, central public sector enterprises (CPSEs), and ₹2.07 trillion from other non-tax sources.

Revenue strength

“This reflects a calibrated fiscal strategy anchored in revenue strength rather than expenditure cuts," the first of the two people said on the condition of anonymity.

In FY25, non-tax revenue stood at ₹5.31 trillion (revised estimates), according to the budget estimates for FY26.

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In FY26, the Centre expects an all-time high ₹2.3-2.5 trillion surplus transfer from the Reserve Bank of India (RBI), the official added. Last fiscal year, it had approved a dividend of ₹2.11 trillion for FY24—141% higher than that for FY23. The Centre also expects a record dividend from central public sector enterprises this year, the person cited above said.

On 12 May, Radhika Rao, executive director and senior economist, DBS Research Group said the transfer could be ₹2.5-2.7 trillion this year. The central board of RBI on Thursday met to review its economic capital framework, under which it transfers surpluses to the government.

To be sure, the fiscal deficit as a share of GDP would also depend on the economic growth rate and the inflation trend, in addition to adjustments to spending and changes in receipts.

Growth goals

India’s economy is projected to grow between 6.2% and 6.8% in 2025-26, with forecasts varying due to global uncertainties and domestic factors.

The Economic Survey 2024-25 projected India’s GDP to grow between 6.3% and 6.8% in 2025-26, reflecting confidence in the economy’s underlying resilience.

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In contrast, the International Monetary Fund (IMF) has trimmed its growth forecast for the country to 6.2%, citing global trade tensions and policy uncertainty, particularly US tariffs.

On inflation, the RBI expects consumer price index-based inflation to remain stable at 4%, assuming a normal monsoon and steady commodity prices.

“The fiscal roadmap for 2025-26 strikes a balance between consolidation and growth," the second person said on the condition of anonymity. “By leveraging strong non-tax revenues instead of resorting to aggressive spending cuts, the Centre aims to preserve growth momentum while maintaining fiscal discipline, even in a volatile global environment," the person added.

Defence spike

The Centre may fail to restrict expenditure as much as last fiscal year due to likely higher government spending on defence following the recent military conflict with Pakistan. The four-day conflict in the wake of Operation Sindoor, itself will have some extra cost towards defence spending, according to experts.

“The fiscal deficit target is quite realistic," observed Madan Sabnavis, chief economist at the Bank of Baroda. “Managing the deficit is essentially about balancing revenue and expenditure. Any unexpected spending, particularly on capital expenditure in defence or war-related needs, can be offset through higher non-tax revenue. Such adjustments are manageable within the current framework," Sabnavis said.

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“It’s unclear how much has been spent on the conflict so far, but any additional burden can be addressed by reallocating resources from other expenditure heads or trimming some government programmes. Even if there are slippages, they should be manageable," he added.

On 28 April, Mint reported that dividends from state-run companies to the exchequer are likely to cross ₹80,000 crore in 2025-26, an all-time high, due to strong contributions from oil and gas, power, and mining sectors.

Robust earnings in these sectors, along with a focus on boosting returns from public sector investments, are expected to sustain the growth in dividend inflows.

Dividend payouts

During 2024-25, CPSEs’ dividend collections stood at around ₹74,016.68 crore, despite global headwinds and domestic demand pressures, beating revised estimates of ₹55,000 crore by a huge margin.

A finance ministry spokesperson didn’t respond to emailed queries.

“These (recent) episodic tensions are unlikely to derail the medium-term appeal of the Indian economy. More substantial developments like the just concluded India-UK trade deal, impending bilateral trade agreement with the US, measures to attract trade-diversion flows and the central bank’s dovish tendencies will dictate the path of India’s growth as well as trade outlook," Rao of DBS Research Group said in a 15 May note.