India's fiscal deficit for FY26 came in at 5.4% of GDP, below the revised budget estimate of 5.5% and significantly below the 5.8% deficit of FY25, marking continued progress on India's fiscal consolidation roadmap. The better-than-expected outcome was driven by a Rs 2.1 lakh crore shortfall in revised expenditure versus budget estimates, primarily due to under-spending by state-owned enterprises and savings on subsidy outlays.
Tax revenues for FY26 exceeded budget estimates by Rs 1.4 lakh crore, with income tax collections growing 18.6% year-on-year to Rs 23.4 lakh crore and GST revenues exceeding Rs 22 lakh crore. Disinvestment proceeds fell short of the Rs 50,000 crore target, coming in at just Rs 31,200 crore as the government chose to prioritise strategic value over quick divestment at depressed valuations for select PSUs.
The fiscal consolidation is positive for India's sovereign credit rating and for maintaining the credibility of the RBI's monetary policy. A lower fiscal deficit reduces the government's borrowing programme, which in turn keeps bond yields lower and provides more room for private sector credit to expand. Finance Ministry officials expressed confidence that the FY27 fiscal deficit target of 4.9% of GDP is achievable given the strong revenue momentum and commitment to prioritise quality capital expenditure over populist spending.
