India’s Fiscal Deficit Woes Deepen as Spending Outpaces Receipts

If you’ve ever wondered what the term “fiscal deficit” means for India and why analysts keep watching it, you’re not alone. This piece aims to explain India’s fiscal deficit in everyday language, walk through the latest numbers, explore why it matters, and consider what it means for you, me, and the economy.

What is India’s fiscal deficit?

Put simply: India’s fiscal deficit is the gap between what the central government spends and what it earns (excluding borrowings). If the government spends more than its non-borrowed income, it must borrow to cover the difference.
In other words:

• Revenue includes tax collections (income tax, GST, customs duties) and non-tax receipts (dividends, interest income, etc).
  
• Expenditure includes everything the government does: payments, subsidies, interest on debt, and capital or infrastructure spending.
  
• Fiscal deficit = expenditure minus (revenue + non-debt capital receipts).
  (This is the definition used by the Controller General of Accounts in India.)
  

Why this matters: A persistent large fiscal deficit means the government keeps borrowing. That borrowing comes with interest, which in turn means less money available for new programmes, or higher taxes, or both. It also influences inflation, interest rates, and long-term growth.

Latest snapshot: Where is India right now?

Here’s the recent picture for India’s fiscal deficit — and it’s telling.

Key numbers

• In the first half of the 2025-26 financial year (April to September), India’s central government fiscal deficit was ₹5.73 trillion.
  
• That amount is 36.5% of the full-year target set for the year.
  
• For comparison: In the same period last year, the deficit was around 29.4% of the annual target.
  
• Revenue side: Tax collections (net to the Centre) were ₹12.29 trillion — this was about 43.3% of the full-year target.
  
• Non-tax revenue (which includes a large dividend from the Reserve Bank of India) jumped significantly, helping offset slower tax growth.
  
• On the spending side, capital expenditure (infrastructure, etc) rose strongly — up about 40% year-on-year for H1.
  

What are the targets?

• The government has set the fiscal deficit target for FY26 (2025-26) at 4.4% of GDP.
  
• In nominal terms, this works out to around ₹15.69 trillion (for the full year) in the budget estimates.
  

Why is the fiscal deficit widening?

When I looked at the numbers, three major drivers stood out:

1. Higher capital spending
   The government has been accelerating infrastructure and capital projects, which means a bigger chunk of expenditure is going into capex rather than just routine spending. While this is good for growth, it pushes up the deficit in the near term. For H1, capex spending hit more than half of the full-year target.
   
2. Slow tax growth
   Despite expectations of strong revenue, net tax collections have lagged. A subdued economy, changes in GST rates, slower corporate tax growth all play a role. This weakens the revenue side of India’s fiscal deficit equation.
   
3. Windfall non-tax revenues
   On the upside, non-tax receipts (such as central bank dividend, profits of public sector entities) soared. This has helped offset some of the tax shortfall and kept the fiscal deficit from ballooning out of control.
   

Why you should care

You might ask: “Okay, but how does this affect someone like me?” Good question. Here are some real-life implications:

• If the government keeps borrowing heavily, interest payments go up. That means less room for social programmes, subsidies, or new initiatives.
  
• Borrowing can push up interest rates for the entire economy (including for home loans, business loans) because the government is competing for capital.
  
• A large deficit can also weaken inflation control and reduce the flexibility the central bank has to act.
  
• For businesses and markets, investors watch fiscal health closely. A strong fiscal position boosts confidence in the economy, foreign investment, and so on.
  
• From a citizen perspective: If taxes rise or subsidies are cut to control the deficit, it directly touches household budgets.

Timeline of India’s fiscal deficit over the past decade

Historical overview

• According to data from Trading Economics, India’s central government budget-deficit averaged about –5.15% of GDP from 1970 to 2024.
  
• More recently, for FY 2024–25 the budget deficit is estimated at 4.8% of GDP.
  
• For FY 2025–26, the government has set a target of 4.4% of GDP.
  
• During the pandemic, deficits ballooned: for example, in 2020–21 the deficit peaked around –9% of GDP (and even deeper in some readings).
  

What this tells us

• The trend shows that India’s fiscal deficit surged during crisis years (2008 global financial crisis, 2020 pandemic) and is now moderating.
  
• The government is signalling a return to more sustainable levels by aiming for ~4.4% of GDP for FY26, from higher levels in recent years.
  
• While the absolute number (rupee value) of the deficit remains large, the ratio to GDP is a key metric to watch for sustainability.
  

Context & comparisons

• A deficit of 4-5% of GDP is not unusual for emerging markets, but it does raise questions about long-term debt sustainability, especially given growth, interest rates and inflation.
  
• The fact that India is targeting ~4.4% indicates an attempt to strike a balance between growth-oriented spending (infrastructure, capital outlay) and fiscal discipline.
  

What lies ahead: Risks and opportunity

Here are a few things to keep an eye on:

Risks

• If tax revenues remain weak, meeting the 4.4% of GDP target becomes harder. Some analysts already expect shortfalls.
  
• If interest rates rise (domestic or global), debt servicing costs go up, leading to a heavier load.
  
• Growth slowdown: If the economy weakens, both tax revenues dip and borrowing needs rise — a double whammy.
  

Opportunities

• The push on infrastructure (capex) can drive growth, which over time boosts tax revenues and can help reduce the deficit-to-GDP ratio.
  
• Strong non-tax receipts provide a buffer. If managed well, they can allow the government to invest without too much deficit expansion.
  
• If nominal GDP growth holds up or accelerates, the same deficit in rupee terms becomes a smaller percentage of GDP — which strengthens fiscal metrics.
  

My personal take

I’ll share a quick anecdote. Think of the government’s budget like your household budget. If you decide to renovate your house (major spending) and finance it with a credit card (borrowing), you hope that the renovation will boost your future income or save you money — maybe you can rent part of the house, or reduce maintenance bills. But if your income stagnates, the monthly interest payments bite and you end up trapped.

In India’s case: the renovation is the big infrastructure push. The hope is that this unlocks growth, jobs, productivity. But the income side (taxes) is a bit weak right now. The government is counting on non-tax windfalls and growth kicking in. The key will be execution in the next half of the year.

For you as a citizen or investor: keep an eye on how much the government invests, how fast growth and tax revenues pick up, and whether borrowing stays within sustainable limits. Because every rupee the government borrows today will affect what resources are available tomorrow.

Final word

 India’s fiscal deficit is widening in the first half of FY26 — at ₹5.73 trillion and 36.5% of the annual target — driven by higher capital spending and sluggish tax growth. The government’s goal remains to contain the full-year deficit at 4.4% of GDP, which is achievable but challenging unless revenue surprises and growth holds up.
If you keep this simple three-question lens in mind — spending up? revenue up? borrowing under control? — you’ll be well-equipped to understand how India’s fiscal story unfolds.