Challenges apart, fiscal consolidation is on the right track

Even as economic trade-offs keep challenging with negative fiscal impulse to growth, its consolidation process is set to continue. FY26 GDP will be targeted at 4.5 per cent. Ex-interest revex/GDP may fall to 7.7 per cent, while capex/GDP may get sticky at 3.1-3.2 per cent. Amid easing tax buoyancy, gross taxes are likely to grow by nine per cent, with gross tax/GDP easing to 11.7 per cent. Mild sweeteners on personal taxes and concessional corporate tax scheme for manufacturing hubs and FDIs are likely, while the Reserve Bank of India (RBI) dividend may stay solid. Net borrowing will be lower than that in FY25 at Rs. 11.15 trillion, with small savings likely to fund 24 per cent of GFD. Policy focus may move to re-establishing consolidated debt/GDP as the anchor ahead. Many experts maintain that boosting asset sales and better resource allocation are the least growth-impinging instruments of fiscal consolidation. The overarching policy trade-offs persist between nurturing the weak growth and diminishing fiscal space with challenging debt dynamics.

The upcoming budget will be watched for the pace of fiscal consolidation and policy priorities amid tepid private consumption, and missing private capex. To be fair, the effective fiscal impulse has been significantly negative over the years, with the Centre consistently surpassing fiscal targets. However, the policy prerogatives may remain largely similar with the focus firmly on a credible consolidation. Creating fiscal space for growth ahead will require innovative ways to boost the revenue stream (asset sales via functional infra monetization, disinvestment/strategic sales, and better resource allocation) without compromising on the quality of public expenditure. Separately, policy focus will soon move to re-establishing consolidated debt/GDP as the anchor and finding steady-state GFD/GDP and growth to decisively put debt on a declining path ahead. Slower capex and solid revenue stream, led by personal income tax and non-tax revenues, is likely to help fiscal target being overachieved at 4.7 per cent of GDP.

For FY26, Emkay expects GFD/GDP at 4.5 per cent, although it does not rule out the possibility of the government being more ambitious. The scope of being too populist in its approach remains bleak amid moderating tax revenue growth and high committed revex. The asset sale print would remain sub-Rs. 50 billion, while RBI dividend would be viewed closely. Analysts presume a 10.6 per cent nominal GDP growth. Spending proportion of revex over capex may be somewhat higher than seen in post-Covid years till FY24, with the focus on human capital and the agri sector. Some tweaks in personal income tax slabs may be expected to improve disposable income of the middle income strata. However, given choice between tax cuts and rural spending, the latter will have a much faster fiscal multiplier effect, indicating another ‘Make in India’ push for industry. The fiscal deficit at 4.5 per cent looks like the new normal, offering flexibility to tinker the glide path to romp up inclusive growth. Thus, adherence to fiscal prudence, as per Ecowrap, is a sine qua non for government while continuing fiscal consolidation path.