Budget 2025: Govt on course for lower fiscal deficit in FY25 and FY26, says finance minister Nirmala Sitharaman

New Delhi/Mumbai: The government’s proposal to achieve a fiscal deficit target of 4.4% of India’s gross domestic product for 2025-26 and the marginally lower net borrowing than the previous fiscal should keep the bond markets at ease.

On Saturday, the government pegged the net borrowing for 2025-26 at ₹11.5 trillion, lower than ₹11.6 trillion in FY25. Meanwhile, the gross borrowing was higher at ₹14.8 trillion in FY26, as per data presented in the Union Budget.

“The bond market should react positively to this given that the net borrowing programme is almost unchanged,” said Madan Sabnavis, chief economist at Bank of Baroda. “The bond yields should remain stable, and the market will wait for further direction from the RBI MPC policy.”

The 10-year G-sec (government security) yield stood at 6.7% on Friday.

The Centre is on track to achieve a fiscal deficit of 4.8% of GDP in 2024-25, with a further reduction to 4.4% targeted for 2025-26, finance minister Nirmala Sitharaman announced in her budget speech on Saturday. This revised estimate marks an improvement from the earlier target of 4.9% for 2024-25.

Fiscal deficit is the shortfall between a government’s income and expenditure and is expressed as a percentage of GDP. A higher fiscal deficit raises debt and debt servicing, which strains the economy and risks devaluing the currency and impacting private investments.

On 13 January, Mint reported citing people aware of the matter that India may record a fiscal deficit for FY25 at 4.7-4.8% of GDP, below the budgeted estimate of 4.9%, primarily driven by lower expenditure, notably on planned capital investments, along with higher-than-anticipated dividends from the Reserve Bank of India (RBI).

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Churchil Bhatt, executive vice-president, investments at Kotak Life Insurance, said that the net government borrowing remains in line with bond market expectations at ₹11.5 trillion. “The government remains committed to fiscal consolidation with the intention to bring down the central government debt-to-GDP ratio from the current 57% to around 50% by FY2031.”

According to the finance minister’s budget speech, the revised estimates for central government receipts for 2024-25 are expected at ₹31.47 trillion, which includes net tax receipts of ₹25.57 trillion. The Union Budget for 2024-25 presented in July had pegged total receipts at ₹32.07 trillion and expenditure at ₹48.21 trillion.

Meanwhile, the revised estimates for expenditure for 2024-25 are expected at ₹46.17 trillion, which includes the government’s capital expenditure of ₹10.18 trillion.

To finance the fiscal deficit, the net market borrowings from dated securities are estimated at ₹11.54 trillion in 2025-26, Sitharaman said in her budget speech, adding that the balance financing is expected to come from small savings and other sources.

The centre's commitment to fiscal consolidation should benefit the debt market despite the economic growth falling behind expectations in FY25, experts said.

"Another 15-basis-point reduction in the 10-year government security is expected after today’s announcements. No other major economy has been able to reduce fiscal deficit at this pace post covid, bolstering India’s place as an upcoming economic power," said Debopam Chaudhuri, chief economist of Piramal Enterprises.

"The tax cut led to additional income available to India’s vast middle class and aspiring population is expected to override the slow public capex in FY26 and provide the Indian economy with the necessary boost to come out of the current slowdown," he said.

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Others too said that the fiscal deficit target managed to meet expectations.

The fiscal deficit target for 2025-26 is entirely in line with our expectations, said Manoranjan Sharma, chief economist, Infomerics Ratings. "This is greatly welcome for the domestic macroeconomy and will send the right message to global investors, multilateral institutions and the global rating agencies."

Not everyone believes that the bond markets would be happy with the borrowing estimates. A fixed income head at an investment bank said that the market was expecting net and gross borrowings of ₹11.1 trillion and ₹14.4 trillion, respectively, and therefore the benchmark bond yield could rise by 5 basis points (bps).

While most reiterated that the fiscal policy announcements highlight the government's commitment to economic stability, a peer comparison shows India needs to catch up.

"India has made significant progress on the fiscal consolidation roadmap outlined in FY22, with the fiscal deficit projected to be 4.4% of GDP in FY26,” said Rumki Majumdar, economist, Deloitte India. “While the country has effectively reduced the fiscal deficit from 9.2% of GDP in FY2021 to 4.8% in FY2025, it still lags behind emerging peers like Vietnam and Indonesia."

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