India can spend an additional ₹0.8trn in the fiscal year 2025-26 without breaching its fiscal targets, said credit rating agency ICRA in a recent report. The report attributed this capacity to higher gross domestic product (GDP) and the Reserve Bank of India's (RBI) dividend payout.
According to ICRA’s report, the central government managed to cap the fiscal deficit for FY2025 at 4.8% of GDP, aligning with its target, despite higher capital expenditure (capex) and a shortfall in tax collections.
The fiscal deficit for the year stood at ₹15.8trn, Rs 0.1trn higher than the Rs 15.7trn revised estimates (RE). This marginal slippage was offset by a 2% upgrade in nominal GDP, which kept the deficit-to-GDP ratio steady. Revenue expenditure was also reined in, falling ₹0.9trn short of budgeted levels, while revenue receipts missed estimates by ₹0.5trn, mainly due to weak net tax collections.
Notably, the central bank had transferred a record ₹2.7trn dividend to the government which is more than what had been budgeted. This unanticipated windfall gives the Centre headroom to ramp up capital spending in FY2026 without unsettling its fiscal math. If the entire surplus goes into infrastructure, capex could rise to nearly ₹12trn for the year, marking a 14.2% jump over FY25.
"Further, there is still some more headroom to hike excise duty on petrol and diesel further, owing to the softening in oil prices, following those undertaken in April 2025 (of Rs 2/litre each). This provides some comfort on the fiscal front amid heightened global uncertainties," ICRA noted.
April 2025 data already signals this shift. Capital expenditure shot up by 61% year-on-year to ₹1.6trn, even as revenue expenditure dipped by 5.7%. The monthly fiscal deficit, despite the spending surge, was contained at ₹1.9trn—around 12% of the full-year estimate.
"The upward revision in the FY2025 nominal GDP number also augurs well for meeting the deficit and debt-to-GDP targets for FY2026. Despite a relatively lower projected nominal GDP growth of 9.0% in FY2026 [ICRA’s forecast] vs. the budgeted levels of 10.1%, the fiscal deficit-to-GDP can be contained at 4.4% in FY2026, while also accommodating a marginal fiscal slippage [to the tune of Rs 300-350bn], given the larger base," the report said.
