Fiscal Challenges for the

Reserve Bank of India

The Reserve Bank of India faces significant fiscal challenges as it
navigates India's complex economic landscape. These challenges
require careful balancing of monetary policy with fiscal realities while
supporting the government's economic objectives.

This presentation examines the current fiscal situation, analyzes key

performance metrics, and explores the outlook for FY26. We'll
investigate how recent policy decisions impact India's fiscal
consolidation goals and what challenges lie ahead.

by Dr Amit lal
Fiscal Deficit Performance
(FY25)
Target Achievement Corporate Sector
The Centre successfully met Challenges
its revised fiscal deficit target Achievement was complicated
of 4.8% of GDP for FY25, by declining corporate
demonstrating commitment to profitability across several
fiscal discipline despite sectors, creating pressure on
challenging economic government revenue streams
conditions. and necessitating careful
budget management.

Revenue Shortfall
Provisional tax revenue fell short by 2.3% compared to revised
estimates, with particular weakness observed in key economic
sectors including IT, banking, and automobiles.

Meeting the fiscal deficit target under these conditions signals strong
fiscal management capabilities, though the underlying challenges
highlight potential vulnerabilities in India's economic recovery.
Tax Revenue Trends

17% 8.3%
Income Tax Growth Corporate Tax Growth
Year-on-year increase showing Significantly slower growth
robust personal income tax reflecting sectoral challenges
collection

-0.5%
Customs & Excise
Marginal decline from policy shifts
and demand weakness

The divergence between personal income tax and corporate tax growth
reflects the uneven nature of India's economic recovery. While individual
taxpayers continue to contribute strongly to the exchequer, businesses
face headwinds that have limited their tax contributions, creating an
imbalance in revenue sources.
Measures to Bridge the Fiscal Gap
Revenue Expenditure Reduction RBI Surplus Transfer
The government implemented strategic spending cuts, A record transfer of ¹2.68 lakh crore from the Reserve Bank
reducing revenue expenditure by 2.6% compared to revised of India played a crucial role in narrowing the fiscal gap.
estimates. This disciplined approach was particularly This amount exceeded the combined ¹2.56 lakh crore
significant as revenue expenditure constitutes expected from both RBI and public sector bank dividends.
approximately three-fourths of total budget spending.
The surplus transfer represents significant support from the
Areas of reduction included postponement of non-essential central bank to government finances during a challenging
projects and optimization of administrative expenses while fiscal period.
maintaining essential services.
Debt Management and
Fiscal Consolidation Goals
Current Position
Present debt-to-GDP ratio exceeding sustainable levels

Interim Targets
Gradual reduction through consistent fiscal discipline

2031 Goal
50% debt-to-GDP ratio by March 2031

Achieving this ambitious target requires maintaining fiscal discipline over

multiple political cycles. External risks including potential tariff wars and
persistent weakness in private investment could significantly disrupt this
consolidation path, requiring policy flexibility and contingency planning.
FY26 Challenges and Outlook

Fiscal Deficit Target GDP Growth Assumption

4.4% of GDP for FY26 10.1% nominal growth (ambitious)

Investment Delay Risk Inflation Risk

Postponed projects hurting capital Low inflation could increase deficit
formation percentage

The ambitious nominal GDP growth assumption of 10.1% appears increasingly difficult to achieve as inflation continues to
moderate. With real growth unlikely to compensate fully, this creates a significant risk to deficit calculations that rely on this
denominator.
Capital Expenditure Performance
$12.00

$8.00

$4.00

$0.00
FY24 FY25 (RE) FY25 (Actual) FY26 (BE)

The FY25 capital expenditure outperformed revised estimates by 3.3%, demonstrating the government's commitment to
infrastructure development. Maintaining the planned ¹11.2 lakh crore capex for FY26 is crucial for economic stimulus,
especially if private investment continues to remain subdued.

This sustained public investment serves both short-term growth objectives and long-term productivity enhancement goals for
the Indian economy.
Income Tax Rate Cuts:
Impact Analysis
Tax Rate Reduction
Lower personal income tax rates implemented

Taxpayer Decision
Spend additional disposable income or save it?

Spending Scenario
Increased consumption boosts economy and tax revenue

Saving Scenario
Higher savings rate reduces consumption impact

The ultimate fiscal impact of the tax cuts remains uncertain. If taxpayers
channel their increased disposable income into consumption, it could
create a virtuous cycle of economic activity and potentially increase
indirect tax collections. However, if precautionary saving dominates, the
fiscal cost may not be offset by economic benefits.
Key Factors for FY26 Fiscal Success
Fiscal Discipline
Maintaining spending control

Robust Tax Collection

Improved compliance and economic activity

Sustained Capital Expenditure

Continued infrastructure investment

Strong Consumption
Increased domestic spending

The government demonstrated commendable fiscal discipline in FY25 despite revenue challenges. Looking ahead to FY26,
success will hinge on these four key factors amid uncertain macroeconomic conditions, potential global disruptions, and
ambitious growth targets that may prove difficult to achieve.
The Path Forward: Centre's Spending as
Economic Driver
Government Spending
Primary economic growth driver

Private Sector Response

Investment following public initiative

Economic Momentum
Sustained growth and fiscal stability

The burden of maintaining economic momentum will continue to rest heavily on the Centre's spending decisions in the
coming fiscal year. With private investment remaining cautious and global uncertainties persisting, strategic government
expenditure becomes the critical lever for economic stability.

Policymakers must carefully balance short-term growth imperatives with long-term fiscal sustainability goals, while remaining
agile in response to evolving economic conditions both domestically and globally.