Budget 2025: FY26 fiscal deficit target likely at 4.5%, says SBI Research

India's fiscal deficit is likely to be budgeted at 4.5 per cent of GDP for FY26, amounting to Rs 15.9 lakh crore, according to an SBI Research report.

This marks a reduction from the 4.9 per cent target for FY25 and a sharper decline from the actual deficit of 5.6 per cent recorded in FY24. The report highlights that while fiscal prudence should remain a priority, a flexible approach may be necessary to support growth amid global uncertainties. 

Union Budget 2025 will be presented by Finance Minister Nirmala Sitharaman on Saturday, February 1. The first part of the Budget session will begin on January 31 and conclude on February 13, 2025, while the second part will start on March 10 and end on April 4, 2025.

SBI Research projects nominal GDP growth at 10.2 per cent in FY26, assuming real GDP expansion of 6.2-6.4 per cent and inflation moderating between 4 and 3.8 per cent. This would take the country’s nominal GDP to Rs 357.2 lakh crore.  

With a lower fiscal deficit, the Centre's net borrowing is expected to moderate to Rs 11.2 lakh crore in FY26, while gross market borrowing could touch Rs 14.4 lakh crore due to increased redemptions, particularly from COVID-era borrowings. The government has already conducted Rs 1.1 lakh crore in buybacks and Rs 1.46 lakh crore in bond switches in FY25.  

The share of direct taxes in total tax revenue is expected to reach 58 per cent in FY25, the highest in 14 years. Notably, personal income tax (PIT) collections have outpaced corporate tax collections since FY21, with PIT's share rising by 7 per cent and corporate tax by 4 per cent over the past five years.  

The study also points to a sharp rise in direct benefit transfers (DBT) for women-centric welfare schemes, with eight states spending nearly Rs 1.5 lakh crore on such initiatives. 

These schemes, offering Rs 1,000-2,000 per month in cash transfers, account for 3-11 per cent of the states’ revenue receipts. While some states, like Odisha, have the fiscal capacity to sustain such measures without borrowing, the overall impact on state finances needs careful evaluation.  

The Union Budget for 2024-25 had set a fiscal deficit target of 4.9 per cent of GDP, lower than the previous year’s 5.6 per cent, driven by higher revenue growth of 15 per cent against an 8.5 per cent rise in expenditure. The Centre's fiscal deficit between April and October 2024 stood at 46.5 per cent of the full-year estimate of Rs 16.13 lakh crore.