India’s fiscal consolidation drive has been sharp and credible after the short-term countercyclical measures during the pandemic period. However, this has come with the cost of a subdued growth of general government expenditure (Centre + states) as a fraction of GDP.
The ratio was 27.4% in FY25, marginally lower than 27.8% in FY17. Turning even further to the past, the ratio improved from 26.6% in FY13—an 80 basis points increase between FY13 and FY25. Even this modest rise is largely due to the increased expenditure by the state governments, although the combined share of the Centre and the companies owned by it would easily exceed that.
What this implies at a broader level is that the ongoing fiscal consolidation is spearheaded by expenditure control as much as resource enhancement. While the focus on creating more fiscal space for public capital expenditure by way of savings in ungainful categories of revenue spending is creditworthy, it’s clear that productive social infrastructure spending has also suffered in the process.
Buoyancy Gap
Budget FY27 is going to be presented against the backdrop of a likely further slippage in the Centre’s total expenditure, from the budgeted 14.2% of GDP in the current fiscal year. With gross tax revenues growing just 3.3% on year in April-November against 12.5% projected for the year as a whole, tax buoyancy in the current fiscal is likely to be much lower than the 1.1x budgeted. This bucks the trend of a steady rise in tax-to-GDP ratio since the Covid-induced trough.
The fall in tax growth is primarily due to the deep income tax and Goods and Services Tax (GST) cuts. Meeting the fiscal deficit target of 4.4% of the GDP for FY26 might therefore require a significant reduction in expenditure compared to the Budget Estimates. In fact, in April-November 2025, the Centre’s revenue expenditure grew at an anaemic 1.8%.
A positive is that even under such constraints, the Centre’s budget capex grew 28.2% in the first eight months of the current fiscal year, more than four times the budgeted pace. This clearly reflects the government’s commitment to maintain the relative quality of spending, even amid the resource constraints. States have performed relatively badly on the capex front with just 10% annual increase in April-November.
According to CareEdge, states utilised only 38.3% of the budgeted capex amount for the full fiscal year by November-end. Accelerated public spending in physical infrastructure and in areas like health, education, and research and development is vital for raising the economy’s growth capacity, and sustainable development. A quantum jump in gross capital formation (GCFI) in infrastructure is a prerequisite for fruition of the Viksit Bharat plan.
Unlocking Frozen Capital
Public spending will have to play a crucial role in the GCFI project. Over the next five years, India’s tax-to-GDP ratio must go up by at least 5 percentage points from the current level of 18%, which is the lowest among BRICS countries. The size of general government expenditure, net of interest payments, ought to hence rise by a comparable measure. Though additional taxes can’t be an option, a widening of the tax base, and concerted focus on collecting the due taxes and using it for productive expenditure is a must. Over Rs 16.5 lakh crore of direct taxes are caught in protracted litigation, and a similar sum is to be recovered as indirect taxes as well. That itself is around 60% of the Centre’s current annual Budget size.