Fiscal consolidation expected to be driven by moderation in revenue expenditure in FY26

The Reserve Bank of India (RBI) has stated in its latest annual report that during 2024-25 (as per revised estimates or RE), the Union government contained the gross fiscal deficit (GFD) to 4.7 per cent of GDP; 0.2 per cent below budget estimates (BE); primarily through containment of revenue and capital expenditure. Revenue expenditure rose by 5.8 per cent in 2024-25 (RE), broadly in line with Budget Estimates or BE. In 2024- 25 (RE), interest payments and outgo on major subsidies as per cent of GDP declined by 0.1 per cent and 0.2 per cent, respectively, as compared to 2023-24.

Capital expenditure undershot the BE by Rs 92,682 crore and was placed at 3.1 per cent of GDP in 2024-25 (RE) as against 3.2 per cent of GDP in 2023-24. In 2024-25 (RE), the gross tax revenue exceeded its BE by Rs 13,285 crore, rising to 11.6 per cent of GDP from 11.5 per cent in 2023-24.

Net tax revenue to the Centre grew by 9.9 per cent, lower than the growth of gross tax revenue owing to higher growth in devolution of taxes to the states. Driven by the surplus transfer from the Reserve Bank, the non-tax revenue grew by 32.2 per cent in 2024-25 (RE) over 2023-24.

In FY26, Fiscal consolidation is expected to be driven by moderation in the revenue expenditure to 11.0 per cent of GDP in 2025-26 (BE) from 11.2 per cent in the previous year. On the expenditure side, interest payments are expected to rise by 12.2 per cent. While the subsidy outgo for fertiliser and petroleum has been budgeted to decline by Rs 3,411 crore and Rs 2,600 crore, respectively, food subsidy is expected to increase by Rs 6,000 crore in 2025-26 (BE).

Capital expenditure is budgeted to grow by 10.1 per cent and is estimated at 3.1 per cent of GDP in 2025-26 (BE). The buoyancy of gross tax revenue is budgeted at 1.1 in 2025-26 (BE), with direct taxes at 1.2 [1.5 in 2024-25 (RE)] and indirect taxes at 0.8 [0.7 in 2024-25 (RE)]. The gross tax revenue is budgeted to reach its peak of 12.0 per cent of GDP in 2025-26 (BE), highest post 2007-08.

Gross market borrowings, as per cent of GDP, are expected to slightly decline in 2025-26 (BE). Market borrowings, followed by small savings, remain the main sources of financing the GFD.

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