Balancing the Books

The Union Budget speech by the Finance Minister captures public attention with a few headline-grabbing announcements. Yet, buried in the fine print of the 200-page annexure lies the real story of the government’s finances, where money comes from and where it goes. The latest budget for the financial year 2025-26 offers a fascinating glimpse into India’s fiscal priorities, revealing a mix of optimism, discipline and political pragmatism.

The government’s tax revenues are expected to grow robustly, with gross tax receipts budgeted at Rs. 42.7 trillion, up from Rs. 38.53 trillion this year. After transferring Rs. 14.22 trillion to states, the Centre’s net tax revenue will be Rs. 28.37 trillion—an 11 percent increase. Direct tax collections, despite income tax sops costing Rs. 1 trillion, are set to rise by 12.65 percent, driven by expectations of an urban demand revival and a boost to micro, small, and medium enterprises (MSMEs). Indirect taxes, however, are a mixed bag. While the Goods and Services Tax (GST) is forecast to rise to Rs. 11.78 trillion, up from Rs. 10.62 trillion, customs and excise duties remain sluggish.

Beyond taxation, non-tax revenue - profits, dividends, and disinvestment proceeds - is set to rise to Rs. 5.83 trillion. The government expects stronger returns from public sector undertakings (PSUs) and the Reserve Bank of India’s dividend, a trend that has bolstered revenues in recent years. Disinvestment receipts, though, remain modest at Rs. 47,000 crore, indicating a reluctance to aggressively privatize state-owned enterprises.

On the spending side, the government’s total expenditure is budgeted at Rs. 50.65 trillion, with revenue expenditure (day-to-day expenses) at Rs. 39.44 trillion and capital expenditure (long-term investments) at Rs. 11.21 trillion. While capital expenditure has been a key driver of post-pandemic recovery, its share of GDP remains around 4.3 percent, higher than pre-pandemic levels but not significantly increasing. Ministries overseeing infrastructure - railways, roads, and defence - account for the bulk of capital outlay, while social spending remains relatively restrained.

The government’s establishment costs, including salaries and pensions, continue to climb, reaching Rs. 8.68 trillion. Spending on central schemes and subsidies, including food and fertilizer, remains stable at Rs. 4.26 trillion. Defence remains a major cost at Rs. 4.91 trillion, alongside substantial allocations for home affairs and rural development. Meanwhile, the railways, benefiting from increased ticketing revenue, require just Rs. 3,445 crore in support.

But the real challenge lies in managing the deficit. The revenue deficit - the shortfall between regular government income and routine expenses - is expected to fall to Rs. 5.24 trillion (1.5 percent of GDP), down from Rs. 6.1 trillion (1.9 percent). If grants in aid for capital assets are considered as investment rather than expenditure, the effective revenue deficit shrinks further to just Rs. 1 trillion (0.3 percent of GDP). The government’s fiscal deficit, which is the gap between total spending and revenues, stands at Rs. 15.68 trillion (4.4 percent of GDP), down from 4.8 percent this year.

While fiscal discipline appears to be improving, debt remains a concern. The Centre’s outstanding liabilities, which had fallen from 52 percent of GDP in 2013-14 to 49 percent in 2018-19, surged to 61 percent during the pandemic. The government now aims to reduce it to 50 percent of GDP by 2030-31. If nominal GDP grows at 10.5 percent annually, debt will fall within 48.4-51 percent of GDP. This is manageable, but still high by emerging-market standards.

However, fiscal consolidation must be balanced with sustaining economic momentum. Infrastructure spending has underpinned growth in recent years, but private sector participation remains crucial. A slowdown in private investment could strain government finances, forcing a choice between higher borrowing or reduced spending. Meanwhile, rising global interest rates and external shocks, such as oil price fluctuations or geopolitical tensions, could add further uncertainty.

India’s budget reflects a fine balancing act, boosting capital investment while keeping borrowing under control. But whether this fiscal discipline can be maintained depends on external shocks, economic growth, and political pressures. If revenue projections hold and reforms continue, India’s fiscal path may remain steady. But any economic slowdown or populist spending spree could throw these calculations off balance. As ever, the numbers tell a story, but it is the execution that will determine the ending.

(The author is a Chartered Accountant and works at Authomotive Division of Mahindra and Mahindra Limited. Views personal.)