The Indian government aims for a reduced fiscal deficit of 4.4% of GDP for the fiscal year 2025-26, down from the revised 4.8% for the current year, as announced by Finance Minister Nirmala Sitharaman in the budget on Saturday.
However, to finance this deficit, the government raised gross borrowing from the market to 14.82 trillion Rupees ($171.26 billion), up from 14.01 trillion Rupees in the current year.
The reduced deficit target comes even after adjustments to personal taxes, which are expected to result in a revenue loss of 1 trillion Rupees, Reuters reports.
Net market borrowing will amount to 11.54 trillion Rupees, slightly lower than the 11.63 trillion Rupees projected for 2024-25.
The government, which plans to shift to debt-to-GDP as the main benchmark for fiscal policy starting in 2026-27, also announced its goal to reduce debt to 50% of GDP by 31st March 2031, down from the current level of 57.1%.
A smaller budget gap indicates the government's commitment to fiscal discipline, even though there were expectations it would increase capital expenditure to support a struggling domestic economy.
The lower fiscal deficit also enhances foreign investor confidence in government finances and raises the likelihood of a sovereign rating upgrade.
India’s budget deficit has gradually decreased from a high of over 9% in 2020-21.
The government stated that the shift in focus to debt-to-GDP is aligned with current global economic trends.
“It encourages shift from rigid annual fiscal targets towards more transparent and operationally flexible fiscal standards,” it said.
“The budget has struck the right chord balancing fiscal prudence with supporting the slowdown in private demand. The re-emphasis on fiscal consolidation roadmap over the next few years too remains comforting for the markets,” according to Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank.
Attention will now turn to the central bank's monetary policy meeting later this month. The Reserve Bank of India has kept policy rates at 6.5% since February 2023 but is expected to start reducing borrowing costs as both growth and inflation show signs of slowing down, BBC reports.
Last week, the central bank revealed plans to inject $18 billion into the domestic banking system to address a cash shortage, a move widely viewed as a precursor to potential rate cuts.