Primary deficit pegged at 0.8 per cent; debt-to-GDP ratio targetted to be brought down to 50 per cent (+_1) by 2031; another year of RBI dividend bonanza expected.
Finance Minister Nirmala Sitharaman on February 1 set an ambitious fiscal deficit target of 4.4 per cent of GDP, lower than the previously targetted medium-term goal of 4.5 per cent by 2025-26, as she walked the talk on fiscal prudence as a non-negotiable aim.
The revised estimates for fiscal deficit in 2024-25 stood at 4.8 per cent, lower than the budgeted 4.9 per cent.
The lower fiscal deficit—short hand for the amount of money the government plans to borrow to fund its expenses—comes despite pencilling in an increased annual expenditure, which is projected to rise by 6.9 per cent to Rs RS 50.63 lakh crore for 2025-26 from the revised estimates of Rs 47.16 lakh crore in 2024-25.
The government’s fiscal carefulness is underpinned by its focus on enhancing revenue collections, with projected tax revenues (net) of Rs 28.37 lakh crore, representing an 11 percent increase from the revised estimates for 2024-25.
The budget also outlines measures to bolster non-tax revenues, dividends from the Reserve Bank of India (RBI), banks and public sector companies, which are expected to generate Rs 5.83 lakh crore in 2025-26, a 10 per cent increase from the previous year.
Sitharaman’s budget demonstrates a careful balancing act, juggling the need for fiscal discipline with the imperative of addressing socio-economic priorities. The government’s commitment to fiscal responsibility is evident in its efforts to contain the primary deficit to 0.8 per cent of GDP, lower than the 1.3 per cent estimated for 2024-25.
The primary deficit – a key metric that lays bare the government’s borrowing habits – reveals the extent to which India’s debt is being devoured by interest payments. If the government stays on track to meet its targets by March 2026, a shrinking primary deficit will be a telling sign of improved fiscal health, a welcome development for fiscal purists who demand judiciousness in public finances.
The finance minister has also pencilled a capital expenditure of Rs Rs 11.21 lakh crore in 205-26, which is 9.2 per cent greater than the revised Rs 10.18 lakh crore for 2024-25. Over the last three years, government capital expenditure has continued to rise, albeit at a tad slower rate in this budget, signalling the government’s continue commitment to do investment heavy lifting through highways, ports and other infrastructure projects that spin jobs and multiply income.
There are also signs of a subtle transformation in India’s fiscal approach as evident from the revenue expenditure projections. It is set to grow to Rs 39.44 lakh crore in 2025-26, up 7 per cent from the revised estimates of Rs 36.98 lakh crore for 2024-25.
Revenue expenditure as a percentage of total expenditure is also set to fall marginally from 78.4 per cent 2024-25 to 77.8 per cent in 2025-26.
There was a slight uptick in revenue expenditure as a percentage of total expenditure reverses a six-year slide, during which it plummeted from 88 per cent in 2017-18 to 77 per cent in the Interim Budget of 2024-25.
The tide appears to have turned since the last budget in July 2024, with revenue expenditure creeping marginally, indicating a subtle yet significant shift in the government’s fiscal stance.
This change in direction could well signal the government’s renewed focus on addressing the pressing needs of farmers, small industries, the rural economy, and job creation, with a greater emphasis on budgetary spending on the revenue side.
This is set to fall in 2025-26, albeit marginally.
RBI bonanza again
Finance minister Sitharaman is set to enjoy greater fiscal elbow room in 2025-26 thanks to another projected dividend payout by the Reserve Bank of India (RBI).
The budget has earmarked a projected RBI and banks’ dividend payout of Rs 2.56 lakh crore in 2025-26, on the back of Rs 2.34 lakh crore the government received in 2024-25. The RBI’s recent rounds of aggressive intervention the currency markets to arrest the rupee’s fall may have enabled a higher payout.
The RBI annual payout to the government is generated from its surplus income, earned through investments, valuation changes in its dollar holdings, and fees from printing currency. While the RBI retains a portion of this surplus to bolster its capital, the majority is transferred to the government.
Although the exact amount is usually okayed by the RBI’s central board in May, the government factors in a projected amount in the annual budget estimates.
Tax estimates need to hold
The finance minister has set ambitious revenue targets for 2025-26, buoyed by the RBI’s mega dividend payout that has provided considerable fiscal leeway. The government is projecting a total tax revenue of Rs 28.37 lakh crore, representing a significant increase of 11 per cent from the revised estimates of Rs 25.56 lakh crore for 2024-25. This optimism is driven by expectations of robust growth in various tax categories.
Corporate income tax collections, including cesses and surcharges, are projected at Rs 10.82 lakh crore, up 10 per cent from the revised estimates of Rs 9.8 lakh crore for 2024-25. Similarly, income tax collections, including cesses and surcharges, are set to rise to Rs 14.38 lakh crore in 2024-25, up 14 per cent from the revised estimates of Rs 12.57 lakh crore for 2024-25.
A higher individual income tax collection is anticipated, on the assumption of relatively better income and spending ability, which is expected to boost aggregate demand and corporate profitability.
However, signs of moderation in the broader economy and sluggish household demand may test these assumptions. The government’s GST revenue projections are also optimistic, with higher collections expected to reflect rising household spending. As GST is a destination-based tax, greater consumer demand for goods and services should translate to higher GST revenue. GST revenues for 2025-26 have been projected at Rs 11.78 lakh crore, up 1 per cent from the revised estimates of Rs 10.61 lakh crore for 2024-25. Elevated inflation may also contribute to higher GST collections, as the tax is levied on the final price.
Source: www.moneycontrol.com
