MC Poll | Govt may set fiscal deficit target at 4.5% in Budget 2025-26, say economists

Fiscal deficit target to be 4.5% in Budget 2025

The government is likely to stay on the fiscal consolidation path and set the fiscal deficit target at 4.5 percent of the GDP in the Union Budget for 2025-26, showed a Moneycontrol poll of 15 economists.

“The fiscal deficit target for FY26 is likely to be set at 4.5 percent of GDP, entailing a reduction of 25-30 bps over the projected 4.8 percent of GDP in FY25,” said Aditi Nayar, chief economist at ICRA.

Some economists in the MC Poll noted that the government may go for an even lower fiscal deficit of 4.3-4.4 percent. Bank of Baroda and HDFC Bank both projected that the fiscal deficit target will be set lower than 4.5 percent and within the 4.3-4.4 percent range.

The government had set a fiscal deficit target of 4.9 percent for this fiscal, as the finance minister had reaffirmed the commitment to bring down the fiscal deficit to 4.5 percent or below by FY26.

In the first eight months of the year, fiscal deficit at Rs 8.5 lakh crore had crossed the halfway mark at 52.5 percent and marginally exceeded last year’s number of 50.7 percent.

Experts indicate that muted capex spending, along with a spurt in collections is expected to keep the fiscal deficit target in check, despite nominal growth numbers undershooting the target set in the Budget 2024.

Data released earlier this month pegged the nominal growth this fiscal at 9.7 percent, lower than the budget estimate of 10.5 percent. India’s real growth likely to have slipped to 6.4 percent, as per first advance estimates, owing to a disappointing second quarter when growth hit a near two-year low of 5.4 percent.

In a business-as-usual scenario, lower nominal growth would have increased the fiscal deficit by 10 basis points or 0.1 percentage point to 5 percent.

“For FY2026, we anticipate that the government will favour a gradual pace of fiscal consolidation with the fiscal deficit target to be set at 4.5 percent of GDP, in line with the medium-term plan. This implies a slightly slower pace of fiscal consolidation, which will allow the government to focus on capex spending, and targeted social sector expenditure,” Morgan Stanley economists Upasana Chachra and Bani Gambhir noted.

The nominal growth projection in the MC poll was lower than the previous year’s budget but was higher than this year’s projection.

The economists noted that government may peg the nominal growth at 10.4 percent for 2025-26. The World Bank, in its latest economic outlook, predicted growth at 6.7 percent for 2025-26 exceeding 6.5 percent this fiscal.

Forecasts in the MC poll ranged from 9.5 to 11 percent.