Calibrated fiscal strategy steadies India’s economy amid global turbulence: Economic Survey 2025-26

THEBUSINESSBYTES BUREAU

NEW DELHI, JANUARY 29, 2026

A calibrated fiscal strategy has anchored India’s economic stability amid an era of heightened global uncertainty, enabling the country to stand out for its macroeconomic resilience even as major economies grapple with volatility, according to the Economic Survey 2025-26 tabled in Parliament on Thursday.

Presented by Union Minister for Finance and Corporate Affairs Nirmala Sitharaman, the Survey underscores that prudent fiscal management by the Centre, marked by disciplined deficit reduction, resilient revenue mobilisation and a decisive shift towards capital expenditure, has reinforced confidence in India’s macroeconomic and fiscal framework. It notes that India’s ability to balance growth imperatives with fiscal sustainability has been central to maintaining stability during a period of global economic turbulence, with States playing a critical role as partners in the journey of economic consolidation.

The Survey highlights that a predictable and credible fiscal trajectory pursued by the Centre over the past several years has anchored overall macroeconomic stability. Clearly defined fiscal targets, combined with flexibility to respond to uncertainty, have ensured that fiscal policy has supported growth rather than constrained it. This approach has been complemented by strong coordination with States, particularly through mechanisms designed to sustain capital expenditure across levels of government.

One of the key markers of fiscal consolidation has been the steady reduction in deficits. The fiscal deficit is budgeted at 4.4 per cent of GDP in FY26, down from 4.8 per cent in the previous financial year. Even more striking is the improvement in the quality of expenditure, with the revenue deficit narrowing to 0.8 per cent of GDP in FY26, its lowest level since FY09. This shift has freed up greater resources for capital formation, reinforcing the growth multiplier of public spending. Revenue expenditure has moderated significantly from 13.6 per cent of GDP in FY22 to 10.9 per cent in FY25, creating additional fiscal space for productive investment.

Subsidy rationalisation has also contributed to fiscal strength, with expenditure on major subsidies declining from 1.9 per cent of GDP in FY22 to 1.1 per cent in FY26, even as food security coverage was maintained for nearly 78.9 crore beneficiaries as of October 2025. At the same time, the tax base has expanded steadily, reflecting improved compliance and technological integration. Income tax return filings rose sharply from 6.9 crore in FY22 to 9.2 crore in FY25, signalling rising formalisation, better enforcement through data analytics and an expanding pool of taxpayers as incomes grow.

The Centre’s revenue receipts have shown notable resilience, strengthening from an average of about 8.5 per cent of GDP in the pre-pandemic period between FY16 and FY20 to around 9.1 per cent during FY22–FY25. This improvement has been driven largely by buoyant non-corporate tax collections, which increased from around 2.4 per cent of GDP before the pandemic to about 3.3 per cent thereafter. Technology-led initiatives to curb leakages and enhance efficiency pushed revenue receipts to 9.2 per cent of GDP in FY25. The Survey highlights the impact of the Income Tax Department’s Non-intrusive Usage of Data to Guide and Enable initiative, which leverages behavioural insights and data-driven nudges to improve compliance without coercive enforcement, emerging as a powerful instrument in modern tax administration.

The strength of India’s indirect tax system is evident in the sustained performance of the Goods and Services Tax. The GST taxpayer base has expanded from about 60 lakh in 2017 to over 1.5 crore currently, reflecting deeper formalisation of the economy. Gross GST collections during April to December 2025 stood at ₹17.4 lakh crore, registering a year-on-year growth of 6.7 per cent, broadly aligned with nominal GDP growth. High-frequency indicators point to robust transactional activity, with cumulative e-way bill volumes rising by 21 per cent year-on-year during the same period. The Survey notes that the transition towards a simplified two-rate structure under GST 2.0 is expected to lower compliance costs, streamline transactions and enhance competitiveness, particularly for small businesses and domestic manufacturing, while also supporting household consumption through lower costs.

Non-tax revenues have provided steady support to the Centre’s fiscal position, remaining broadly stable at around 1.4 per cent of GDP in the post-pandemic period. Improved performance of Central Public Sector Enterprises has played a significant role in this stability. Between FY20 and FY25, net profits and dividends per CPSE rose by 174 per cent and 69 per cent respectively, reflecting enhanced operational efficiency and prudent capital management, and strengthening the government’s non-tax revenue stream.

In line with Prime Minister Narendra Modi’s vision of Viksit Bharat, the Survey highlights a strong push towards capital expenditure as a cornerstone of fiscal strategy. Effective capital expenditure of the Central government increased from an average of 2.7 per cent of GDP in the pre-pandemic years to about 3.9 per cent post-pandemic, reaching 4 per cent of GDP in FY25. Infrastructure sectors such as road transport and highways, railways, airways and waterways accounted for over half of total capital expenditure, underscoring the emphasis on asset creation. FY25 allocations also recorded robust double-digit growth towards transfers to States, telecom and housing and urban affairs, reinforcing both federal cooperation and long-term growth capacity.

To sustain investment momentum at the State level, the Centre launched the Special Assistance to States for Capital Expenditure scheme in the post-COVID period, offering long-term interest-free loans in recognition of the high multiplier effect of capital spending. Through this initiative, States have been incentivised to maintain capital expenditure at around 2.4 per cent of GDP in FY25, with total uptake amounting to ₹4.49 lakh crore over the past five years. While the combined fiscal deficit of State governments has remained broadly stable at around 2.8 per cent of GDP in the post-pandemic period, it edged up to 3.2 per cent in FY25, reflecting emerging fiscal pressures.

The Survey cautions that sustaining growth will require complementary discipline in State-level revenue expenditure. It emphasises the need for careful reprioritisation of spending to ensure that short-term income support measures do not undermine investments critical for inclusive and sustainable medium-term prosperity.

India’s public debt management strategy is highlighted as another pillar of fiscal credibility, especially against the backdrop of rising global debt levels. The government’s medium-term target of achieving a debt-to-GDP ratio of 50 plus or minus one per cent by FY31 reflects a calibrated effort to strengthen debt sustainability while retaining policy flexibility. The debt-to-GDP ratio declined to 55.7 per cent in FY25, a reduction of 7.1 percentage points since 2020, even as public investment levels remained elevated.

The Survey notes that India’s fiscal model stands out for its public investment efficiency. In FY24, general government investment stood at 4 per cent of GDP, equivalent to about one-fifth of total government revenue, significantly higher than in most peer economies. It cautions that fiscal slippages at the State level could have implications for sovereign borrowing costs, reinforcing the need for coordinated consolidation across the general government.

Looking ahead, the Economic Survey proposes a range of reforms to deepen fiscal consolidation, including reducing cross-subsidies, stabilising equity monetisation pipelines by revisiting the definition of government companies, advancing trust- and nudge-based mechanisms in e-way billing, improving expenditure efficiency and strengthening management of short-term surpluses. It also points to ongoing tax reforms, including GST 2.0 and personal income tax changes, as critical levers to simplify structures, reduce compliance costs and broaden the tax base, with positive implications for both economic activity and revenue mobilisation.

Taken together, the Survey concludes that India’s calibrated fiscal strategy has not only anchored stability during global turbulence but also laid a credible and resilient foundation for sustained growth in the years ahead.