February 3rd, 2025: Finance Minister Nirmala Sitharaman presented the government’s budget for FY26 (April 2025 to March 2026) on February 1. Set against a backdrop of slowing domestic growth and global concerns around the potential for escalating protectionism, the government’s FY26 Budget seeks to target growth-supportive policies while maintaining its path towards fiscal consolidation.
The budget focuses on 10 priority areas, including productivity enhancement in agriculture, inclusive development, manufacturing with a focus on Medium and Small Enterprises (MSME), exports and measures to increase employment and improve skilling. In our view, the budget will help address the cyclical slowdown giving a boost to consumption via tax breaks. At the same time, growth in capex spending will slow to help support fiscal consolidation.
Realistic FY26 Budget Arithmetic And a New Fiscal Consolidation Path Through FY31
The government set a fiscal deficit target of 4.4% of GDP for FY26 (April 2024-May 2025). This is down from FY25 when the deficit came in at 4.8%, just below its 4.9% target. The budget assumes nominal GDP growth of 10.1%, with overall revenues budgeted to rise by 9.8% and expenditures to increase by 14.2%. The revenue loss from tax breaks is likely to be offset by lower revenue expenditure. The FY26 Budget is expected to give a boost to consumption via tax breaks. Meanwhile, on the expenditure side and similar to trends in the last few years, the quality of fiscal spending is improving. There remains a continued focus on increasing infrastructure expenditure (albeit at a slower growth rate of 11% YoY) and on reducing subsidies. India’s budgetary allocations to capital expenditure nearly doubled from 1.6% of GDP in FY19 to 3.1% of GDP in FY25. We see this as credit positive as it bodes well for medium-term growth.
With this budget, the government appears well-positioned to achieve the deficit target it set out in FY22 of 4.5% by FY26. Encouragingly, it announced a new fiscal consolidation path through FY31 to gradually reduce the deficit in coming years such that central government debt remains on a declining path from 57.1% of GDP currently to roughly 50 per cent by FY31.
Credit Rating Implications
India’s credit rating (BBB (low), Positive Trend) balances India’s public finance challenges with the economy’s high growth potential. India’s fiscal deficits – at the center and state level – and level of government debt are higher than its peers in the BBB rating range and remain a key credit weakness.
The IMF expects India’s general government deficit to be 7.5% of GDP with the debt-to-GDP ratio to stabilize just above 80% over the next five years. However, the government is implementing a multi-yearfiscal consolidation, and the cumulative and ongoing benefits of India’s structural reform efforts look likely to lift India’s potential growth rate. The IMF expects India to remain among the fastest growing major economies from 2025 to 2029. In the context of heightened global uncertainty, India’s FY26 budget doubles down on the government’s medium-term economic strategy of supporting growth while maintaining its commitment towards fiscal consolidation, all of which bodes well for India’s credit rating.