Budget 2025 Expectations: India is poised to meet its medium-term target of a 4.5 per cent fiscal deficit to GDP by 2026, which it had set in 2021, according to Bank of America (BofA). The Ministry of Finance continues to strike a delicate balance between fostering economic growth and maintaining fiscal prudence. While economic expansion has remained a priority, the fiscal deficit has steadily declined from the pandemic-induced highs, progressively stabilising toward the 4.5 per cent target.

BofA highlighted that while the upcoming Union Budget may not unveil the next phase of fiscal targets, clarity is expected in 2026 after achieving the current goals. For FY25, the fiscal deficit is estimated at 4.9 per cent of GDP, aided by lower capital spending, which is expected to offset potential shortfalls in revenue collection.

Balancing Growth and Fiscal Prudence

India has achieved notable fiscal consolidation over the last three years without compromising its growth objectives, BofA stated. However, with nominal GDP growth projected to remain in single digits for an extended period, the trade-off between growth and fiscal consolidation could become more pronounced, the global brokerage added. 

Manufacturing, which constitutes about 17 per cent of GDP, continues to fall short of the 25 per cent target. BofA emphasised that while fiscal and monetary policies have tightened significantly in recent months, the upcoming Union Budget could incorporate measures to correct this course. Focused support for capital expenditure (capex) and consumption could reignite private sector growth.

Capex Target for FY26

A hallmark of Prime Minister Narendra Modi's second term was the government's emphasis on capital expenditure, which rose to 3.2 per cent of GDP in FY24. However, the current term has seen a deceleration in spending intensity, BofA noted. With projected capital expenditure for FY25 estimated at ₹9.5 trillion, the figure trails the budget estimate of ₹11.1 trillion, reflecting execution delays and capacity constraints. The upcoming budget could include a renewed push for capex, with a target of ₹12 trillion for FY26, BofA added. Historically, higher development multipliers have accompanied increased capital spending, and the government is expected to motivate states and bureaucracies to enhance execution capabilities.

Revenue Growth Outlook

On the revenue side, BofA projected steady growth, with direct and indirect tax collections potentially converging. Speculation surrounding the rationalization of income tax rates remains unconfirmed, as BofA's base case assumes no changes in the tax regime. GST collections may see minor acceleration, although growth is likely to trail nominal GDP growth due to a tax multiplier closer to one. Non-tax revenues are expected to receive a boost from a significant dividend from the Reserve Bank of India (RBI), attributed to gains from foreign securities and foreign exchange interventions.

In summary, BofA believes India is well-positioned to navigate the trade-offs between growth imperatives and fiscal consolidation. The upcoming budget could focus on rekindling capex momentum while ensuring fiscal prudence. With a stable revenue outlook and supportive non-tax revenue streams, the Ministry of Finance appears on track to achieve its medium-term fiscal objectives, maintaining a balance between development and financial discipline.

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