Centre on course to meet 4.4% FY26 fiscal deficit target, says Economic Survey

In the year of the pandemic, the fiscal deficit of the Central Government reached 9.2 per cent of GDP

• Govt aims to reduce fiscal deficit to 4.4% of GDP by FY26, as pledged in FY21
• Fiscal consolidation achieved by enhancing expenditure quality and capital focus.
• India's credit rating upgraded in 2025, first major boost in nearly 20 years.

Did our AI summary help?

The Centre is on track to reduce its fiscal deficit to 4.4 percent of gross domestic product (GDP) in FY26, fulfilling the commitment made in FY21 to halve the deficit ratio within five years, the Economic Survey 2025–26 said.

“The government has targeted a fiscal deficit of 4.4 percent for FY26 and is on course to achieve it, thus fulfilling the commitment made in FY21,”  it said.

Finance Minister Nirmala Sitharaman tabled the survey in Parliament on January 29.

“It is noteworthy that the government was determined to and succeeded in bringing down the fiscal deficit ratio as promised, despite it not being a legislative target,” the survey said, underlining the credibility of the consolidation path.

The adjustment was achieved even as expenditure quality improved. Fiscal consolidation, it said, took place “even while improving the quality of fiscal expenditure with a concurrent emphasis on capital expenditure”.

“In the year of the pandemic, the fiscal deficit of the Central Government reached 9.2 per cent of GDP, partly on account of pandemic-related and induced expenditure and to a determination to bring below-the-line budget expenditures above the line,” the survey said, recalling the extraordinary fiscal expansion during the Covid-19 shock.

The sharp widening of the deficit was accompanied by a clear intent to end off-budget practices. “It also aimed to draw a line under such practices in the future,” the survey said, adding at the time, “the finance minister committed to reducing the Central Government’s fiscal deficit ratio by at least half in five years”.

Follow our live blog for the latest on Economic Survey 2025-26

Medium-term fiscal discipline under scrutiny

The survey emphasised that fiscal credibility has taken on greater importance in the current global environment, where capital flows are sensitive to policy predictability and debt dynamics. With government bonds now included in global indices, investors are increasingly assessing general government finances rather than focusing solely on the Centre.

Against this backdrop, meeting the FY26 deficit target assumes particular significance, signalling the government’s intent to anchor expectations through disciplined fiscal management, it said.

The assessment suggests that adherence to the announced consolidation path, combined with a sustained push towards capital expenditure, has helped balance near-term growth support with medium-term stability, demonstrating that fiscal consolidation and growth-supportive spending need not be mutually exclusive when underpinned by credible policy intent and execution.

Capital expenditure focus and credibility gains

The survey said the consolidation strategy was not driven by expenditure compression alone but by a reorientation towards growth-supportive spending, with a sustained emphasis on capital expenditure alongside revenue mobilisation and improved expenditure management.

This approach strengthened fiscal credibility at a time when global investors were increasingly focused on macro stability and medium-term fiscal anchors.

“Among other things, the conservative and prudent approach to fiscal management, which enhanced fiscal credibility, led to India’s sovereign rating upgrades by several credit rating agencies in FY26,” it said.

India got credit rating upgrades from multiple agencies in 2025, marking a significant shift after a prolonged period without upgrades. The upgrade by a major global rating agency was India’s first such improvement in nearly two decades, reflecting improved confidence in the country’s macroeconomic and fiscal trajectory, it said.