India's Fiscal Deficit Likely Pegged at 4.5% of GDP for FY26, ₹11 Lakh Crore Capex Proposed: ICRA

The fiscal roadmap for India is set to achieve a significant milestone in FY26, with the fiscal deficit targeted at 4.5% of GDP, according to projections by credit rating agency ICRA. This target marks a 25-30 basis point (bps) reduction from the projected 4.8% of GDP for FY25, aligning with the government’s medium-term fiscal consolidation plan.

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₹11 Lakh Crore Capex: Sustaining Growth Momentum

ICRA recommends that the government allocate a capital expenditure (capex) budget of ₹11 lakh crore for FY26, maintaining parity with the FY25 target. This level of spending represents a 12-13% increase over the expected capex outlay of ₹9.7 lakh crore for FY25. The emphasis on capex is crucial to sustaining infrastructure development and stimulating long-term economic growth.

Capex Shortfall in FY25

Despite ambitious targets, ICRA's Chief Economist Aditi Nayar pointed out that the record budgeted capex of ₹11.11 lakh crore for FY25 is likely to fall short by approximately ₹1.4 lakh crore. As of November 2024, only ₹5.13 lakh crore (46% of the Budget estimate) had been spent, indicating a slower-than-expected pace of disbursement.

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Fiscal Prudence and Borrowing Limits

Nayar emphasized the importance of fiscal discipline, noting that larger borrowing requirements to fund an inflated capex target could lead to higher yields, potentially destabilizing financial markets. She advocated for setting a realistic capex target in the FY26 Budget, suggesting the government could adjust upward during the fiscal year via supplementary demands for grants if revenue conditions allow.

Balancing Fiscal Deficit and Growth

The reduction in the fiscal deficit is anticipated to be accompanied by a decline in the revenue deficit, enabling the government to allocate sufficient resources for capex without significantly increasing borrowing. This balanced approach aims to sustain growth while keeping the fiscal deficit within reasonable limits.

Call for Consumer Spending Boost

ICRA also highlighted the need for inflation-adjusted relief on personal income tax in the upcoming Budget to stimulate consumer spending. Increased disposable income could bolster demand across sectors, complementing the government's efforts to drive growth through capex.

Looking Ahead: Fiscal Responsibility with Growth Prioritization

As India progresses toward its fiscal targets, the focus remains on striking a balance between growth-oriented capital spending and maintaining fiscal prudence. With the fiscal deficit projected to narrow to 4.5% of GDP, FY26 could mark a turning point in India's economic trajectory, laying the groundwork for sustained infrastructure development and robust economic growth.

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