India's strong fiscal dynamics to propel growth, curb inflation: Report

INDIA'S fiscal dynamics have improved at the aggregate level post-pandemic, with a most notable shift in the quality of spending, which is reflected in the higher capital expenditure by the government over the last five years, according to a Morgan Stanley report.

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The report highlights that the improving fiscal dynamics bode well for the growth mix and inflation management of the Indian economy.

The faster pace of consolidation in revenue deficit is reflective of an improved spending mix, not only by the Centre but also by the states. Indeed, a key change post-pandemic has been the shift towards higher capex by the centre, with Central government capex doubling to 3.2 per cent of GDP in FY2025 from 1.6 per cent of GDP in FY2020 (pre-pandemic), the report further states.

Similarly, states' capex is tracking at 2.3 per cent of GDP in F2025 from 1.9 per cent of GDP pre-pandemic.

"Going forward, we expect the Central government fiscal deficit to consolidate further, albeit at a slower pace to 4.4 per cent of GDP in FY2026, while for the states, we expect the deficit to narrow to 2.6 per cent of GDP," the report states.