India’s Fiscal Deficit Journey: From Pandemic Peaks to 2025-26 Consolidation Targets

When COVID-19 struck in early 2020, governments everywhere faced a tough choice-protect lives or balance books. India, like many nations, chose to spend big to save lives, support jobs, and revive demand. This pushed the fiscal deficit, the gap between government spending and revenue, to record highs.

Five years later, India’s economy tells a different story. The fiscal deficit has steadily fallen, showing financial discipline and policy strength. For FY2025–26, the government aims to bring it down to 4.4% of GDP-an impressive turnaround from the 9.2% pandemic peak. It marks how reforms, rising tax revenues, and better fiscal management rebuilt stability and investor trust.

India’s Fiscal Deficit Trends: Pandemic to Recovery

The fiscal deficit shows how much the government borrows to meet expenses when income falls short. For India, this figure is not just an accounting gap-it reflects economic health and policy credibility.

In 2020–21, the deficit soared to 9.2% of GDP, the highest since independence. Spending rose sharply under welfare and relief programs like PM Garib Kalyan Yojana and Atmanirbhar Bharat. Revenue collection collapsed as the economy shut down.

Soon, the government mapped out a recovery plan through the Fiscal Responsibility and Budget Management (FRBM) Act, aiming to reduce the deficit below 4% by FY2026.

Fiscal data over the years reflects that effort:

• FY2021–22: 6.7% of GDP
• FY2022–23: 6.4% of GDP
• FY2023–24: 5.6% of GDP
• FY2024–25: 4.8% of GDP

According to PRS India and the Finance Ministry, this decline shows how India managed to invest in growth while maintaining fiscal control.

What Happened in 2020–21?

The pandemic year brought an unprecedented economic shock. India’s GDP fell 7.3% as businesses closed and revenues dried up. To support citizens, the government expanded social spending and liquidity support. As a result, the fiscal deficit reached 9.2% of GDP.

Recovery and Consolidation (2021–2024)

Economic recovery gathered pace in the following years. Better tax compliance, higher GST collections, and a rebound in corporate profits boosted revenues. Fiscal discipline became a priority again. The deficit fell to 6.7% in FY22 and 6.4% in FY23.

A shift in spending priorities helped. The government focused on capital expenditure-investments in roads, railways, energy, and logistics-rather than subsidies.

• In FY2023–24, Capex touched ₹10 lakh crore, around 3.3% of GDP.
• In FY2024–25, Capex rose slightly to ₹10.18 lakh crore.

These investments aimed to build future growth while keeping the fiscal path steady.

FY2024–25: Meeting the 4.8% Target

By FY2024–25, data from the Comptroller General of Accounts (CGA) showed India achieved its 4.8% deficit target, worth ₹15.7 lakh crore. Doing so in an election year highlighted fiscal discipline.

Key factors behind this success:

• Higher tax revenue: Net tax receipts rose to ₹25.5 lakh crore.
• Controlled spending: Funds were carefully directed toward infrastructure, defence, and rural development.
• Strong GST growth: Monthly GST collections stayed above ₹1.7 lakh crore on average.

FY2025–26: Targeting 4.4% of GDP

In the FY2025–26 Union Budget, Finance Minister Nirmala Sitharaman reaffirmed the government’s focus on fiscal prudence. The deficit target was set at 4.4% of GDP, amounting to ₹15.69 lakh crore.

Important budget highlights:

• Total expenditure: ₹50.65 lakh crore
• Receipts (excluding borrowings): ₹34.96 lakh crore
• Net tax receipts: ₹28.37 lakh crore
• Nominal GDP assumption: 10.1% growth

This target brings India closer to the FRBM goal of around 3.5% deficit by FY2027, maintaining stability amid uncertain global conditions.

Fiscal Outlook 2026: What India’s 4.4% Target Means for Growth

The move toward a 4.4% fiscal deficit goal has far-reaching effects:

• Investor confidence: Gradual deficit reduction improves India’s credibility and credit ratings.
• Lower borrowing costs: A smaller deficit reduces the government’s interest burden and helps private investment.
• Debt sustainability: The plan aims to cut central debt from 56.1% of GDP in FY26 to about 50% by FY31.
• Consistency with RBI policy: Moderate fiscal tightening supports the Reserve Bank’s price stability efforts.

Challenges remain, such as high interest costs (around 25% of total spending) and steady welfare demands. The focus now lies on boosting GST efficiency and divestment to sustain revenue streams.

However, risks like global commodity spikes, wars, or weak tax buoyancy could slow the pace of fiscal consolidation.

The Road Ahead: Can India Sustain Fiscal Discipline Beyond 2026?

From crisis to consolidation, India’s fiscal story reflects resilience and reform. Between 2020 and 2025, each Budget tightened fiscal control while supporting growth.

The 4.4% target for FY2025–26 is both a milestone and a bridge toward long-term health. As India pushes toward a $5 trillion economy, maintaining discipline will be crucial. A stable fiscal foundation will strengthen investor trust, create space for infrastructure, and support inclusive, sustainable growth.

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FAQs

What was India’s fiscal deficit in 2020–21?

It was 9.2% of GDP, driven by emergency pandemic spending.

What is the fiscal deficit target for FY2025–26?

The government’s goal is 4.4% of GDP, or ₹15.69 lakh crore.

Who monitors India’s fiscal deficit?

The Controller General of Accounts (CGA) under the Finance Ministry compiles and publishes the data.

What contributes most to India’s fiscal deficit?

High interest payments, subsidies, and capital expenditure are the main contributors.

How does a lower fiscal deficit benefit the economy?

It improves fiscal health, reduces borrowing costs, stabilizes prices, and attracts investors.