Union Budget 2025: Centre remains firm on fiscal consolidation path; sees 2025-26 fiscal deficit at 4.4%

When the Covid-19 pandemic hit in March 2020, the Union government upped its expenditure significantly aimed at offering relief to various sections of the society, even if that meant fiscal deficit increased sharply. But in the post pandemic years, fiscal consolidation was back on agenda. Finance Minister Nirmala Sitharaman has carried forward that path in this budget too, even as she delivered a sizeable relief on income tax to the middle class.

"In the July Budget, I had committed to staying the course for fiscal consolidation. Our endeavour will be to keep the fiscal deficit each year such that the Central Government debt remains on a declining path as a percentage of the GDP," Sitharaman said in the Budget speech.

The fiscal deficit target for 2024-25 financial year has been revised slightly downwards to 4.8 per cent of the GDP, from the earlier projected 4.9 per cent. The fiscal deficit target for the 2025-26 financial year has been estimated at 4.4 per cent of GDP.

Lower fiscal deficit, essentially means the government will not spend significantly more than its revenue, and will mean both spending and borrowing are controlled. Continued fiscal prudence should get get a thumbs up from multilateral agencies, credit rating agencies as well as global investors.

One thing that is aiding the government is a strong growth in tax collections. But the government spending was also slow in the first half of the year due to the general elections.

In the Union Budget in July 2024, the total receipts other than borrowings had been estimated at Rs 32.07 lakh crore. Total expenditure was pegged at Rs 48.21 lakh crore. Both have been revised downwards in this Budget. The revised estimate of the total receipts other than borrowings is now Rs 31.47 lakh crore, while revised estimate for total expenditure is Rs 47.16 lakh crore.

In the previous budget, Rs 11.11 lakh crore had been provided for capital expenditure. That has been revised downwards to Rs 10.18 lakh crore.

For the next financial year, Sitharaman projected total expenditure of Rs 50.65 lah crore, while total receipts, other than borrowings, are estimated at Rs 34.96 lakh crore.

Despite the revenue foregone through tax changes, fiscal consolidation is achieved through compression on the expenditure side in 2025-26, pointed Sakshi Gupta, principal economist at HDFC Bank.

"The Finance Minister's fiscal strategy has tilted towards boosting consumption, while the capex target has been kept broadly unchanged from the 2024-25 budgeted plans. The counter-cyclical push provided by the budget is within its broader strategy of fiscal consolidation, targeting a fiscal deficit of 4.4 per cent in 2025-26," Gupta said.

One area where there was some concern was on the subdued capital expenditure numbers. Those concerns were visible in the stock market, with capital goods stocks coming under intense selling pressure post Budget. Engineering and construction giant Larsen & Toubro, for instance, was down more than 3 per cent. Shares of several other companies like Siemens, CG Power and Industrial Solutions, Cummins India, Bharat Heavy Electricals (BHEL) among others declined between 4-6 per cent.

Pranav Haridasan, the MD and CEO of Axis Securities, explained that while the budgeted capital expenditure figure of Rs 11.2 lakh crore for 2025-26 may seem conservative, compared with last year's Rs 11.1 lakh crore, it was important to note that actual spending in the current financial year is likely to fall short of the budgeted target.

"Even with a measured approach this year, capex is still set to grow by over 10 per cent from the previous year's realised levels, with the focus rightly shiftng to execution," he said.

Haridasan pointed that additionally grants to states of Rs 4.3 lakh crore will also significantly aid capex.