Staying the course on fiscal consolidation

‘The Central government has been on a consolidation path in the last five years, with the fiscal deficit-to-gross domestic product ratio declining from a high of 9.2 per cent in FY21 (pandemic period) to 4.4 per cent in FY26, and budgeted at 4.3 per cent in FY27.

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The pace of consolidation has slowed in FY27, compared to previous years. The Centre is focusing on its medium-term goal of achieving a debt-to-GDP ratio of 50 (+/-1) per cent by FY31 from the current level of 56 per cent. This implies that the Centre can afford to proceed more gradually with fiscal consolidation, provided nominal GDP growth remains healthy and government debt declines in line with the outlined trajectory.

‘The Centre has managed to attain the fiscal deficit target of 4.4 per cent of GDP in FY26, despite concerns over lower tax revenue collection. Lower gross tax revenue of around ₹1.9 trillion was offset by a higher dividend transfer by the Reserve Bank of India (RBI) and lower expenditure — mainly revenue expenditure — enabling the government to achieve its fiscal deficit target for the year.