Fiscal prudence in uncertain times: Anchoring growth through discipline

Every year, ahead of the presentation of the Union Budget on February 1, the Finance Minister places the Economic Survey before Parliament during the Budget Session. Accordingly, the Economic Survey 2025–26, tabled by Union Finance Minister Nirmala Sitharaman, once again serves as a valuable and comprehensive document.

Over the years, the scope and coverage of the Economic Survey have expanded significantly. It now provides in-depth inputs on the state of the economy, fiscal developments, monetary management and financial intermediation, the external sector, inflation, and structural reforms.

Reflecting contemporary challenges, climate change, which has a growing impact on economic outcomes, has been addressed in a dedicated chapter titled “Environment and Climate Change: Building a Resilient, Competitive and Development-Driven India.”

With India taking a leading position in artificial intelligence, the Survey also includes a chapter on “Evolution of the AI Ecosystem in India: The Way Forward.” Social sectors such as education and health are covered under “What Works and What’s Next,” while employment and skilling are addressed in “Employment and Skill Development: Getting Skilling Right.” Rural development and social progress receive attention through the theme “From Participation to Partnership.”

In an era marked by global uncertainty and renewed discussions on Swadeshi, the Survey presents a forward-looking perspective through chapters on “Import Substitution to Strategic Indispensability” and “Building Strategic Resilience,” clearly outlining the roles of the State, the private sector, and citizens.

Prepared by the Economic Division of the Department of Economic Affairs, Ministry of Finance, under the guidance of Chief Economic Adviser Dr. V. Ananth Nageswaran, the Economic Survey 2025–26 offers valuable insights into global uncertainties and emerging risks.

It assesses India’s economic resilience while underlining the importance of fiscal prudence, financial buffers, and preparedness to manage challenges arising from trade policy uncertainty, supply-chain disruptions, geopolitical tensions, and global financial risks.

The year 2025 has been particularly challenging. It began with one set of expectations and ended with another for the world, including India, as the Survey rightly observes. Despite these headwinds, India’s commitment to fiscal prudence has enabled it to reduce the fiscal deficit from a peak of 9.2 per cent of GDP in FY 2020–21, amid the COVID-19 pandemic, to 4.8 per cent in FY 2024–25, with a target of 4.4 per cent for FY 2025–26, which is likely to be achieved.

As outlined in the fiscal policy roadmap, from FY 2026–27 onwards, the framework will gradually shift from focusing primarily on annual deficit numbers to anchoring policy on a declining central government debt-to-GDP ratio, targeting around 50 ±1 per cent by March 31, 2031, down from 55.7 per cent in FY 2025.

Over the longer term, further reduction towards 40 per cent of GDP would strengthen macroeconomic stability. This prudent fiscal management has enhanced India’s credibility and strengthened confidence in its macroeconomic framework, leading to three sovereign credit rating upgrades in 2025 by Morningstar DBRS, S&P Global Ratings, and Ratings and Information (R&I), Inc.

The Survey highlights strengthened public finance trends, with the Centre’s revenue receipts rising to 9.2 per cent of GDP, compared to 8.5 per cent during FY 2016–20, supported largely by buoyant non-corporate tax collections. There remains significant scope for improvement through widening the taxpayer base. Income tax return filings increased from 6.9 crore in FY 2022 to 9.2 crore in FY 2025, with direct taxes accounting for 58.8 per cent of total tax collections.

Gross GST collections during April–December 2025 stood at ₹17.4 lakh crore, reflecting a 6.7 per cent year-on-year growth, against Rs 16.3 lakh crore in FY 2025. The proposed transition to a simplified two-rate GST structure (GST 2.0) is expected to reduce compliance costs, streamline transactions, and incentivise formalisation, especially among small businesses.

According to the Survey, the momentum in domestic demand and capital formation has been underpinned by a prudent fiscal strategy marked by steady revenue mobilisation and calibrated expenditure rationalisation. Both the direct taxes and indirect taxes collections have remained robust. Recent tax reforms, including personal income tax restructuring and GST rationalisation, have supported consumption demand while sustaining revenues in absolute terms.

A notable feature of India’s fiscal strategy has been its strong focus on capital expenditure. Capital outlays as a share of total expenditure increased from 12.5 per cent in FY 2020 to 22.6 per cent in FY 2025, while effective capital expenditure rose from 2.6 per cent to 4.0 per cent of GDP. Other side, government has been focused on rationalisation of expenditure, reinforcing the quality of public spending.

On the expenditure side, consolidation has been achieved along side improvement in expenditure quality. Simultaneously, revenue expenditure moderated from 13.6 per cent of GDP in FY 2022 to 10.9 per cent in FY 2025, creating space for productive capital outlays.

Savings were achieved through subsidy rationalisation, reduced leakages via Direct Benefit Transfers, and public financial management reforms such as just-in-time fund releases. As a result, fiscal indicators remain firmly on track in FY 2026, adhering to the budgeted consolidation path.

India with this fiscal prudence is in a better position to withstand any uncertainties arising from global headwinds or any other unforeseen difficulties. Whereas in some of the many peer economies, where post pandemic debt unwinding has been limited. The high debt ratio has an impediment for their growth plans .

The Survey notes that India’s fiscal model stands out in terms of public investment efficiency. In FY 2024, general government investment stood at 4 per cent of GDP, about one-fifth of total government revenue, significantly higher than in many peer economies.

When OECD countries were at income levels comparable to India today, their public investment ranged between 2 and 5 per cent of GDP, even though their tax revenues were in the range of 20 to 28% of the GDP. Hence the Survey states that a relatively higher revenue to public investment ratio, reflects India's clear focus on growth enhancing capital expenditure.

In conclusion, India’s recent fiscal performance has proved to be a significant advantage in a period of global uncertainty, providing both space and flexibility to respond to evolving domestic and international challenges without undermining macroeconomic stability.

(The author is former Chairman & Managing Director of Indian Overseas Bank)