India's Fiscal Trajectory FY25-FY26: Discipline Amidst Headwinds: UPSC Current Affairs Story Arc

Overview

This arc tracks India's delicate walk on the fiscal tightrope between mid-2025 and early 2026. Initially, the government showed strong fiscal discipline, meeting its FY25 deficit targets and securing a credit rating upgrade. However, a paradox emerged: while 'Real GDP' remained robust at 7.8%, low inflation caused 'Nominal GDP' to grow slower than budgeted (8.8% vs 10.1%). Since taxes are collected on nominal values, revenue lagged while the government continued aggressive spending on infrastructure (Capex). This led to a mid-year deficit surge, culminating in the 2025-26 Economic Survey's firm rejection of 'fiscal populism' (like excessive cash transfers) in favor of a disciplined 'Swadeshi' strategy and a historic shift toward capital assets.

How This Story Evolved

FY25 deficit target met (Item 5) and credit rating upgraded (Item 6) → Low nominal GDP slowed revenue growth (Item 13) → Deficit widened to 62% of target by mid-FY26 (Item 11) → Economic Survey and Govt responded by prioritizing disciplined Capex over fiscal populism (Seed, Item 3).

1. 2025-05-31: Government Achieves Fiscal Deficit Target for FY25
   More details

   UPSC Angle: Government Achieves Fiscal Deficit Target of 4.8% of GDP for FY25.

   Key Facts:

   • Fiscal deficit target for FY25: 4.8% of GDP.
   • Fiscal deficit for FY25: ₹15.77 lakh crore (4.8% of GDP).
   • Total government expenditure: ₹46.55 lakh crore (97.8% of revised estimate).
   • Total revenue: ₹30.78 lakh crore (97.8% of revised estimate).
   • Fiscal deficit target for FY26: 4.4% of GDP.
   • Fiscal deficit target achieved: 4.8% of GDP
   • Financial year: 2024-25
   • Data released by: Controller General of Accounts (CGA)
   • Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Creating Capital Receipts)
2. 2025-08-20: India's Fiscal Outlook
   More details

   UPSC Angle: S&P forecasts India's combined fiscal deficit at 7.3% of GDP in 2025-26.

   Key Facts:

   • S&P forecasts combined fiscal deficit at 7.3% of GDP in 2025–26
   • India's debt-to-GDP ratio projected to fall from 83% in 2024–25 to 78% by 2028–29
   • Centre targeting debt-to-GDP ratio of 49–51% by 2030–31
   • S&P upgraded India's rating to BBB from BBB-
3. 2025-09-22: Low Inflation Impact on India's Fiscal Concerns
   More details

   UPSC Angle: Low inflation impacts India's fiscal concerns by slowing nominal GDP growth.

   Key Facts:

   • Nominal GDP growth in April–June 2025 fell to 8.8%, below the Budget assumption of 10.1%.
   • Real GDP growth rose to 7.8% during the same period.
4. 2026-01-01: Centre's Fiscal Deficit Crosses 62% of FY26 Target
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   UPSC Angle: Centre's fiscal deficit crosses 62% of FY26 target.

   Key Facts:

   • Fiscal deficit crossed 62% of the full-year target
   • In the first eight months of FY26
5. 2026-02-01: Economic Survey stresses disciplined Swadeshi, flags fiscal populism
   More details

   UPSC Angle: Economic Survey stresses disciplined Swadeshi and flags fiscal populism.

   Key Facts:

   • Swadeshi should be a disciplined strategy
   • Concerns about fiscal populism flagged
   • Revenue surplus states decreased from 19 in FY19 to 11 in FY25
6. 2026-02-05: Shift in Government Spending Approach
   More details

   UPSC Angle: Government shifts spending from revenue to capital expenditure.

   Key Facts:

   • Revenue expenditure in total spending has declined from 88% in 2014–15 to about 77% in 2026–27.
   • Central subsidies have fallen by about 7 percentage points of total expenditure.
7. 2026-02-17: Financial Sector Reforms in Union Budget 2026
   More details

   UPSC Angle: Union Budget 2026: Measures to deepen corporate bond market.

   Key Facts:

   • Banks currently carry 60–65% of corporate debt, compared to 30% in the U.S. and 40% in Europe
   • Since 2017, government injected ₹3.2 lakh crore into public sector banks

Genesis

Trigger

On May 31, 2025, the Controller General of Accounts (CGA) confirmed India met its FY25 fiscal deficit target of 4.8% of GDP, spending ₹46.55 lakh crore.

Why Now

The success was driven by a post-pandemic commitment to the glide path set in the 2021 budget, aiming for a deficit below 4.5% by FY26.

Historical Context

This connects to the FRBM Act of 2003 and the N.K. Singh Committee recommendations, which shifted the focus toward a sustainable Debt-to-GDP ratio (targeting 49–51% for the Centre by 2030–31).

Key Turning Points

1. [2025-09-22] Recognition of 'Low Inflation' as a fiscal headwind

   It revealed that low inflation, while good for consumers, creates a 'revenue squeeze' by depressing nominal growth.

   Before: Focus was solely on real growth. After: Realization that 7.8% real growth isn't enough to meet tax targets if nominal growth is only 8.8%.

2. [2026-02-01] Economic Survey 2025-26 release

   It officially flagged 'fiscal populism' and 'cash transfers' as threats to the quality of expenditure.

   Before: General acceptance of welfare spending. After: Strict prioritization of 'Disciplined Swadeshi' and Capex over revenue-heavy transfers.

Key Actors and Institutions

Key Institutions

• Ministry of Finance
• Controller General of Accounts (CGA)
• S&P Global Ratings
• Fifteenth Finance Commission

Key Concepts

Nominal vs Real GDP

Real GDP measures volume of output at constant prices; Nominal GDP measures value at current prices (including inflation). Taxes are mostly proportional to Nominal GDP.

Current Fact: Nominal GDP growth fell to 8.8% in Q1 2025, missing the Budget assumption of 10.1%.

Fiscal Consolidation

The policy of reducing government deficits and debt accumulation to maintain long-term economic stability.

Current Fact: The government is targeting a reduction of the fiscal deficit from 4.8% in FY25 to 4.4% in FY26.

Revenue vs Capital Expenditure

Revenue expenditure is for day-to-day operations (salaries, subsidies); Capital expenditure (Capex) builds assets (roads, ports) that boost future growth.

Current Fact: Revenue expenditure as a share of total spending is projected to decline to 77% by 2026-27.

What Happens Next

Current Status

As of February 5, 2026, the government has signaled a structural shift in the budget, reducing revenue expenditure from 88% (in 2014-15) to 77% of total spending.

Likely Next

The Union Budget 2026-27 is expected to formalize the 4.4% fiscal deficit target and further prune central subsidies, which have already fallen by 7 percentage points.

Wildcards

A sudden spike in global oil prices could reignite inflation, helping nominal GDP growth (and tax revenue) but hurting the fiscal deficit via higher subsidy bills.

Why UPSC Cares

Syllabus Topics

• Government Budgeting
• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

Essay Angles

• Fiscal Discipline vs. Social Welfare: The Modern Indian Dilemma
• The Quality of Expenditure: Why what we spend matters more than how much

Prelims Likely: Yes

Mains Likely: Yes

Trend Signal: rising

Exam Intelligence

Previous Year Question Connections

• Trend of Tax-to-GDP and Fiscal Deficit-to-GDP over the last decade. — The current arc shows a break in the trend where revenue (Tax-to-GDP) is under pressure due to nominal GDP slowdown despite high real growth.
• Categorizing technology acquisition and debt financing as Capex or Revenue exp. — Directly relates to the shift in government approach (88% to 77% revenue expenditure) discussed in the Feb 2026 item.

Prelims Angles

• The exact FY25 fiscal deficit target (4.8%) and the FY26 target (4.4%).
• The relationship between inflation, Nominal GDP, and tax buoyancy (lower nominal growth = lower tax growth).
• Definition of 'Swadeshi' as a disciplined strategy rather than a blanket doctrine per the 2025-26 Survey.
• The decline in the number of revenue-surplus states (from 19 in FY19 to 11 in FY25).

Mains Preparation

Sample Question: Analyze the impact of diverging Real and Nominal GDP growth rates on India's fiscal consolidation path. In light of the Economic Survey 2025-26, evaluate the shift from revenue expenditure to capital expenditure as a strategy for long-term growth.

Answer Structure: Intro: Define fiscal deficit and state FY25 success (4.8%) → Body 1: Explain the 'Nominal GDP Squeeze' (8.8% growth impact on revenue) → Body 2: Discuss the rise in Capex and the 62% deficit threshold → Critical Analysis: Risks of fiscal populism (crowding out) and the decline in state revenue surpluses → Conclusion: Way forward via 'Disciplined Swadeshi' and asset creation.

Essay Topic: The Fiscal Tightrope: Balancing Immediate Welfare with Future Productivity.

Textbook Connections

Key Takeaway

India is prioritizing 'Expenditure Quality' (Capex) over 'Expenditure Quantity' (Revenue/Populism) to navigate a fiscal squeeze caused by low nominal GDP growth.

All Events in This Story (7 items)

1. 2025-05-31 [Economy] — Government Achieves Fiscal Deficit Target for FY25
   The Indian government successfully met its fiscal deficit target of 4.8% of GDP for the financial year 2024-25, according to data from the Controller General of Accounts (CGA). Fiscal Deficit is the excess of total budget expenditure over total budget receipts, excluding borrowings.
   More details

   UPSC Angle: Government Achieves Fiscal Deficit Target of 4.8% of GDP for FY25.

   Key Facts:

   • Fiscal deficit target for FY25: 4.8% of GDP.
   • Fiscal deficit for FY25: ₹15.77 lakh crore (4.8% of GDP).
   • Total government expenditure: ₹46.55 lakh crore (97.8% of revised estimate).
   • Total revenue: ₹30.78 lakh crore (97.8% of revised estimate).
   • Fiscal deficit target for FY26: 4.4% of GDP.
   • Fiscal deficit target achieved: 4.8% of GDP
   • Financial year: 2024-25
   • Data released by: Controller General of Accounts (CGA)
   • Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Creating Capital Receipts)
2. 2025-08-20 [Economy] — India's Fiscal Outlook
   S&P forecasts the combined central and state fiscal deficit at 7.3% of GDP in 2025–26, narrowing to 6.6% by 2028–29. India's debt-to-GDP ratio is projected to fall from 83% in 2024–25 to 78% by 2028–29, with the Centre targeting 49–51% by 2030–31. S&P upgraded India's rating to BBB from BBB-, citing its robust economic performance and political commitment to fiscal discipline.
   More details

   UPSC Angle: S&P forecasts India's combined fiscal deficit at 7.3% of GDP in 2025-26.

   Key Facts:

   • S&P forecasts combined fiscal deficit at 7.3% of GDP in 2025–26
   • India's debt-to-GDP ratio projected to fall from 83% in 2024–25 to 78% by 2028–29
   • Centre targeting debt-to-GDP ratio of 49–51% by 2030–31
   • S&P upgraded India's rating to BBB from BBB-
3. 2025-09-22 [Economy] — Low Inflation Impact on India's Fiscal Concerns
   Low inflation in India is a fiscal concern because it slows nominal GDP growth, reducing tax revenue and making it harder for the government to meet Budget and fiscal deficit targets. In April–June 2025, India's nominal GDP growth fell to 8.8%, below the Budget assumption of 10.1%, despite real GDP growth rising to 7.8% during the same period.
   More details

   UPSC Angle: Low inflation impacts India's fiscal concerns by slowing nominal GDP growth.

   Key Facts:

   • Nominal GDP growth in April–June 2025 fell to 8.8%, below the Budget assumption of 10.1%.
   • Real GDP growth rose to 7.8% during the same period.
4. 2026-01-01 [Economy] — Centre's Fiscal Deficit Crosses 62% of FY26 Target
   India's fiscal deficit has crossed 62% of the full-year target in the first eight months of FY26 due to strong government spending on infrastructure alongside slower growth in tax revenues. Capital expenditure has increased significantly, but revenue collections have not kept pace.
   More details

   UPSC Angle: Centre's fiscal deficit crosses 62% of FY26 target.

   Key Facts:

   • Fiscal deficit crossed 62% of the full-year target
   • In the first eight months of FY26
5. 2026-02-01 [Economy] — Economic Survey stresses disciplined Swadeshi, flags fiscal populism
   The Economic Survey 2025-26 emphasizes that 'Swadeshi' should be a disciplined strategy, not a blanket doctrine, and flags concerns about fiscal populism, the crowding out of capital expenditure by cash transfers, and the rise of revenue deficits in states. The number of revenue surplus states has decreased from 19 in FY19 to 11 in FY25.
   More details

   UPSC Angle: Economic Survey stresses disciplined Swadeshi and flags fiscal populism.

   Key Facts:

   • Swadeshi should be a disciplined strategy
   • Concerns about fiscal populism flagged
   • Revenue surplus states decreased from 19 in FY19 to 11 in FY25
6. 2026-02-05 [Economy] — Shift in Government Spending Approach
   The Indian government is shifting its spending approach from revenue to capital expenditure, with the share of revenue expenditure declining from 88% in 2014–15 to about 77% in 2026–27. Central subsidies have fallen by about 7 percentage points of total expenditure.
   More details

   UPSC Angle: Government shifts spending from revenue to capital expenditure.

   Key Facts:

   • Revenue expenditure in total spending has declined from 88% in 2014–15 to about 77% in 2026–27.
   • Central subsidies have fallen by about 7 percentage points of total expenditure.
7. 2026-02-17 [Economy] — Financial Sector Reforms in Union Budget 2026
   Union Budget 2026 introduced measures to deepen India's corporate bond market and diversify financial risks, recognising that banks alone cannot continue to bear the burden of long-term financing. Banks currently carry 60–65% of corporate debt, compared to 30% in the U.S. and 40% in Europe. Since 2017, the government has injected ₹3.2 lakh crore into public sector banks.
   More details

   UPSC Angle: Union Budget 2026: Measures to deepen corporate bond market.

   Key Facts:

   • Banks currently carry 60–65% of corporate debt, compared to 30% in the U.S. and 40% in Europe
   • Since 2017, government injected ₹3.2 lakh crore into public sector banks