The excess of expenditures over revenues is called fiscal deficit. The government finances the fiscal deficit by borrowing directly from the people of India (small savings), financial markets (primarily banks and insurance institutions), and the rest of the world (multilateral loans, foreign portfolio investors). The government’s fiscal deficits and borrowings have tremendous implications for people’s savings and private investments in the economy.
The largest part of the government borrowings come from the people of India directly and indirectly (intermediated by banks and financial institutions). But the government’s fiscal deficits have expanded way beyond the people’s net financial savings.
In 2023-24, the Central government’s fiscal deficit/net borrowings alone (there are additional borrowings by states) were over 100 percent of their net financial savings. As competition of people’s savings increase between the government and the private sector, interest rates rise in the economy.
This has an adverse impact on the government’s budget. It also ends up paying larger and larger interest payments.
In the 2025-26 budget, interest payments were estimated at Rs 12.76 lakh crore, which was over 81 percent of its fiscal deficit of Rs 15.69 lakh crore, and over 25 percent of the government’s total expenditures of Rs 50.65 lakh crore. The government is paying such heavy interest through its nose.
For running large fiscal deficits and borrowings, the government offers two principal rationales:
First, funding capital expenditures for building infrastructure and productive capacity of the economy
Second, taking care of the GYAN (Garib, Youth, Annadata and Nari) and making social investments in health, education and other sector
The boost to economic growth and effectiveness of social investments is doubtful, whereas the appropriation of more than 100 percent of the net financial savings and humongous interest payments is real. This makes the bargain quite dicey.
Should the government adopt a hard policy view about deficit/borrowing to slowdown unproductive expenditures and freebie types of social investments? How is the government’s fiscal responsibility and budget management (FRBM) regime working? What is the likely fiscal deficit in Budget 2026-27?
Fiscal Deficit 2025-26 Likely to Overshoot
The government had estimated the fiscal deficit for 2025-26 of Rs 15.69 lakh crore at 4.4 percent of the estimated GDP of Rs 356.98 lakh crore. Advance estimates suggest that India’s GDP for the year 2025-26 is Rs 357.14 lakh crore, only marginally higher than the estimated GDP.
This was despite the nominal GDP growth at 8.8 percent turning out to be much lower than 10.1 percent assumed in Budget 2025-26, largely on account of the revision of 2024-25 GDP to a higher amount of Rs 330.68 lakh crore Rs 324.98 lakh crore, estimated in the budget.
If the government wants to keep the 2025-26 fiscal deficit at 4.4 percent of the GDP, it can choose to peg fiscal deficit for the year at Rs 15.71 lakh crore, higher by Rs 0.02 lakh crore.
Will That be Sufficient?
The government’s tax revenues are likely to decline by about Rs 1.25-1.5 lakh crore less than the budget estimates of Rs 28.37 lakh crore. There is likely to be higher non-tax receipts of about Rs 50,000-75,000 crore on account of higher Reserve Bank of India (RBI) surplus transfer and dividend receipts from Public Sector Enterprises (PSEs) and banks. There will, however, be some shortfall from disinvestment.
Taking these together, a shortfall of Rs 75,000 crore to Rs 1 lakh crore looks fairly certain.
The expenditure side has not gone out of control despite higher fertiliser subsidy and defence expenditures on account of the recent 'war' with Pakistan. There are some likely savings as well: capital expenditures, R&D grant, provisions for employment schemes, etc.
If the government decides to match expenditure cuts to revenue shortfall, it can keep the fiscal deficit to 4.4 percent. Otherwise, it might have to be raised to 4.5 percent as every 0.1 percent increase allows the government to borrow Rs 35,700 crore more.
My assessment is that the government will keep the fiscal deficit at 4.4 percent or even slightly lower to convey the message that everything is well.
Small Savings May Fund Additional Borrowings
The government is supposed to revise small savings interest rates every quarter. Interest rates had declined somewhat in the financial system after the RBI reduced repo rates by 1.25 percent since December 2024. The government, however, chose not to revise the small savings rates in 2025-26.
As a result, small savings inflows have been somewhat higher than budgeted in first nine months. Of late, interest rates have increased to last year’s levels. Despite this, the government is likely to overshoot estimated small savings borrowings of Rs 3.43 lakh crore for the year.
The government may choose to fund higher fiscal deficit from these additional savings or keep them for use next year if it decides not to raise fiscal deficit.
Fiscal Responsibility Regime is Dead
The government had amended the Fiscal Responsibility and Budget Management (FRBM) Act in the 2018-19 Budget to place a hard peg of 3 percent of the GDP on its fiscal deficit from year 2020-21. Using COVID-related disruptions as the excuse, the government junked the FRBM stipulation for 2020-21 in the 2021-22 Budget by raising it to over 9 percent of the GDP.
Since then, the government has been maintaining much higher fiscal deficits, which averaged over 6 percent for the five years of Modi 2.0. Thereafter, these are being brought down but are far from the 3 percent goal. The government has stopped talking about FRBM fiscal deficit target.
Fiscal Deficit to Touch Rs 16.45 Lakh Crore in 2026-27
The Modi government is unlikely to let the expenditure purse strings loose for 2026-27. The fact that 2026-27 is the middle year of Modi 3.0 and the outcomes of Assembly elections in this year cycle are unlikely to be influenced by any central tax giveaways or higher expenditures, it is likely that the government would contain total expenditures increase to about 5 percent to 6 percent over the 2025-26 BE.
Total expenditures for 2026-27 are, therefore, likely to be pegged between Rs 53.25 to Rs 53.75 lakh crore.
The government is highly unlikely to embark on another tax giveaway misadventure in 2026-27 as well. Tax receipts for 2026-27 can be fairly estimated at 10 percent higher than revised tax receipts of Rs 27.5 lakh crore for 2025-26, ie about Rs 30.25 lakh crore.
Bigger rupee depreciation against the dollar and continued higher dollar interest rates in 2025-26 mean higher surplus for RBI. The government can, therefore, legitimately expect an increase of Rs 50,000 crore in non-tax receipts, which will take it to Rs 6.3 lakh crore.
However desirable rapid disinvestment is, there are no signs that the government is going to ramp up the disinvestment programme next year. Non-debt capital receipts may, therefore, be kept at about Rs 75,000 crore, near last year’s level.
Total revenue receipts are, therefore, likely to be Rs 37.30 lakh crore.
The resultant fiscal deficit at Rs 16.45 lakh crore will amount to 4.2 percent of the GDP of Rs 395.64 lakh crore, factoring an increase of 10.5 percent in nominal GDP over advance estimates of Rs 357.14 lakh crore for 2025-26.
(Subhash Chandra Garg is the Chief Policy Advisor, SUBHANJALI, and Former Finance and Economic Affairs Secretary, Government of India. He's the author of many books, including 'The $10 Trillion Dream Dented, 'We Also Make Policy', and 'Explanation and Commentary on Budget 2025-26'. This is an opinion piece, and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)