The Government of India will focus on reducing the fiscal deficit to 4.5% on gross domestic product (GDP) in the Union Budget for the financial year 2026 (FY26). This estimate has been made clear in a report by the Union Bank of India (UBI). According to the report, this deficit is estimated to be 4.8% in 2025, which has been targeted to be reduced to 4.5% in 2026. This will strengthen the government’s efforts for fiscal consolidation and provide long-term stability to the country’s economy. In this article, we will analyze this major goal of the budget in detail.
Fiscal deficit and its need:
Fiscal deficit happens when the total expenditure of the government exceeds its total income. The government finances it by borrowing. It is necessary for the economic health of any country that its fiscal deficit remains under control. If it is high, the government has to borrow more, which increases interest payments and affects long-term economic stability. In developing countries like India, the government has to spend more on infrastructure, social welfare schemes, and the defense sector, making it challenging to balance the deficit.
Fiscal deficit situation in 2025:
It has been challenging for the government to keep the fiscal deficit under control in FY 2025. The main reason behind this has been relatively low capital expenditure (Capex) and increasing subsidy burden. Global geopolitical events, such as the Russia-Ukraine war and instability in the Middle East, led to an increase in energy prices, forcing the government to spend more on fuel and food subsidies. According to the report, despite the reduction in government spending, the fiscal deficit is estimated to reach 4.8%.
Strategy to reduce fiscal deficit to 4.5% in 2026:
The government will focus on fiscal consolidation to bring down the fiscal deficit to 4.5% in 2026. For this, several strategies will be adopted, such as cutting government expenditure, increasing revenue collection, implementing tax reforms, and launching targeted incentive schemes to stimulate the economy. The government can promote digital payments to increase tax revenue and take strict measures to prevent tax evasion. Also, setting preferences against capital expenditure can increase investment in infrastructure.
Possible tax reforms in the budget
The government may announce some tax reforms to reduce the fiscal deficit. Changes in income tax slabs are possible to provide relief to individual and corporate taxpayers. Apart from this, focus may be on simplifying the Goods and Services Tax (GST) structure and improving tax compliance. The government may give tax incentives to promote the digital economy, which will increase tax collection and strengthen the financial position.
Effects on investment and capital expenditure (Capex):
Keeping capital expenditure consistent will be the government’s priority as part of efforts to control the fiscal deficit. Maintaining investment in infrastructure will accelerate long-term economic growth. The government can try to attract more investment from the private sector by promoting the public-private partnership (PPP) model. Also, capital expenditure can be given priority in sectors like railways, defense, and renewable energy.
Impact on inflation and interest rates:
Controlling the fiscal deficit can be helpful in keeping inflation and interest rates stable. If the government controls its expenditure and limits borrowing, there will be no surplus cash in the market, which will keep inflation under control. Apart from this, it will be easier for the Reserve Bank of India (RBI) to keep interest rates balanced, which will boost investment and consumption.
Response of government and industry:
According to the UBI report, the government will remain committed to maintaining fiscal discipline, but there are mixed reactions to this from the industry. Some experts believe that the government should announce more challenging measures in this period of economic slowdown. On the other hand, some analysts believe that keeping the fiscal deficit under control is essential for long-term economic stability.
Future Challenges and Opportunities:
Although the government is committed to reducing the fiscal deficit, it will face many challenges. Global economic uncertainty, a possible increase in oil prices, and supply chain problems may affect the government’s financial plans. Despite this, India has opportunities such as economic changes, expansion of the digital economy, and production-linked incentive schemes (PLI), which can be helpful in financial stability.
The Union Budget 2026 will be important for India’s economic situation. The government’s goal of limiting the fiscal deficit to 4.5% reflects financial discipline, which will maintain long-term stability and investor confidence. However, the government will have to make a balance so that the deficit can be controlled without affecting economic growth. The upcoming budget and RBI’s monetary policy will play an important role in finding out the country’s economic situation.