Context:

• The article provides a detailed analysis of the Government of India's (GoI’s) fiscal performance for the financial year 2024–25 (FY25), based on provisional data, and evaluates its implications for FY26.
• It highlights key trends in deficit containment, capex growth, revenue collection, and looming policy changes, which are crucial from the perspective of macroeconomic management and fiscal federalism in India.

 Fiscal Performance in FY25 - A Mixed Bag:

• Fiscal deficit trends:
  • FY25 fiscal deficit stood at Rs 15.77 trillion, slightly above the Revised Estimate (RE) of Rs 15.7 trillion.
  • As a percentage of GDP, the fiscal deficit was contained at 4.8%, aligning with the target due to higher-than-estimated nominal GDP.
• Revenue deficit milestone:
  • Revenue deficit was curtailed to Rs 5.7 trillion, lower than RE of Rs 6.1 trillion.
  • This amounted to 1.7% of GDP, a 17-year low, and an improvement from the 1.9% target.
• Capital expenditure (Capex) surge:
  • Capex exceeded expectations, reflecting stronger infrastructure push.
  • April 2025 alone saw 61% year-on-year increase in capex, reaching Rs 1.6 trillion.

Receipts and Revenue Challenges:

• Shortfall in tax revenues:
  • Gross tax revenues missed FY25 RE by Rs 0.6 trillion.
  • To meet FY26 targets, tax revenue must grow at 12.5%, up from earlier 10.8% projection.
• Compensatory dividends: A Rs 0.4 trillion higher-than-budgeted RBI dividend transfer, offering partial cushion for FY26.
• Miscellaneous capital receipts: In April 2025, such receipts were 46% of FY26 BE, versus nil in April 2024, indicating positive early momentum. 

FY26 Outlook - Optimism with Caveats:

• Nominal GDP revision as a fiscal cushion:
  • FY25 nominal GDP was 2% higher than First Advance Estimate.
  • Despite a lower FY26 nominal growth projection of 9% (ICRA), the fiscal deficit can be contained at 4.4%, aided by a larger base effect.
• Capital expenditure momentum: Capex can potentially exceed BE by Rs 0.8 trillion, pushing the total to Rs 12.0 trillion, ensuring higher public investment momentum.
• Expenditure composition and timing: FY26 requires higher revenue expenditure growth than earlier estimated, but lower capex growth, due to front-loading in April.

 Emerging Fiscal Policy Considerations:

• Finance Commission recommendations: The 16th Finance Commission's upcoming report will redefine Centre-State fiscal relations for the next five years.
• Geopolitical and defence implications: Potential increase in defence spending due to global tensions may crowd out developmental expenditure.
• Pay Commission (8th) impact: The timing of the Pay Commission award could strain central finances and influence state-level fiscal decisions.
• Future of GST compensation cess: The imminent cessation of GST compensation cess in its current form raises questions on Centre-State revenue sharing.

Conclusion - A Cautiously Optimistic Fiscal Trajectory:

• India’s fiscal consolidation trajectory appears largely on track, with encouraging signs from higher capex and lower revenue deficit.
• However, medium-term sustainability will depend on structural reforms in revenue mobilization, expenditure efficiency, and Centre-State fiscal coordination in light of upcoming institutional and geopolitical developments.