Fiscal Deficit and Its Impact on the Indian Economy

Each year, at the time of the Union Budget presentation, fiscal deficit emerges as an important economic measure under focus. The word fiscal originates from Latin word fiscus, which means a public basket of money. In simple terms, fiscal relates to government money.

Key Takeaways

• Currently, India’s fiscal deficit is 4.8%. In numbers, it is Rs 15.77 lakh crore. 
• The government plans to reduce the fiscal deficit to 4.4% in FY 2025-26.
• A higher fiscal deficit is a bad sign. It affects the loan rates, pushes up the price of goods and services, increases government debt, and slows down private investment.
• By March 31, 2031, the government wants the central government’s debt-to-GDP ratio to be about 50%(+ or - 1%).

What is Fiscal Deficit?

Fiscal Deficit refers to a gap in government’s budget; a gap that arises in any financial year when the government’s total expenditure exceeds its total income in that year and consequently it borrows money to cover that gap.

Now let us understand it this way, in the 2024 Union Budget, the government estimated total receipts at about ₹30.8 lakh crore and total spending at around ₹47.7 lakh crore. Since spending was much higher than income, this gap is called the fiscal deficit. To manage this gap, the government planned to borrow money.

Causes of India’s Fiscal Deficit

Here are some of the important causes that contribute to the financial deficit of India: 

The government spends a lot on subsidies for food, fuel, and fertilisers.

• The government pays interest on old loans every year.
• The government gives dearness allowance to its employees, which increases spending.
• Many people and businesses do not pay taxes due to a large informal sector.
• The tax system does not collect enough money.
• Cuts in GST rates reduce government income.
• Slow global growth reduces tax collection.
• Economic uncertainty forces the government to spend more.

Trends in India’s Fiscal Deficit

Over the last few years, the Government of India has chosen to spend more on long-term work like roads, railways, and big infrastructure. This helps future growth, but it also puts pressure on today’s finances.

What the numbers say

• Capital spending was about 1.6%of GDP in 2014-15
• It has risen to about 3.1%of GDP in 2025-26
• Tax income did not grow at the same speed
• In the first half of 2025-26, tax revenue grew by only 2.8%
• In 2024–25, the government spent around ₹46.55 lakh crore
• In the same year, it earned about ₹30.78 lakh crore
• The gap came to ₹15.77 lakh crore
• This gap equals a fiscal deficit of 4.8% of India’s GDP

Impact of Fiscal Deficit on the Indian Economy

A high fiscal deficit changes money flow in the economy. It affects borrowing, prices, debt, and confidence.

• Interest rates go up
  
  
  • The government borrows more money
  • More borrowing increases demand for loans
  • Loan supply stays limited
  • Loans become costly for people and businesses
  • RBI keeps rates unchanged due to high deficit
     
• Inflation increases
  
  
  • Fiscal deficit rises by 1%
  • Inflation rises by 4.70 percentage points (CPI)
  • Prices of goods and services increase
  • Buying power of people falls
     
• Private investment reduces (crowding out)
  
  
  • Government uses more bank credit
  • Less credit remains for private companies
  • Borrowing cost increases
  • Businesses invest less
     
• Government debt increases
  
  
  • Debt in FY 2024–25: Rs 181.74 lakh crore
  • Debt in FY 2025–26 (projected): Rs 196.78 lakh crore
  • Higher debt increases future interest payments
     
• Revenue pressure increases
  
  
  • GST rates cut
  • Tax collection slows
  • Capital spending reaches 51% of the yearly target
     
• Investor confidence weakens
  
  
  • High deficit signals risk
  • Currency faces pressure
  • Interest rates may rise further
  • Economic stability weakens

India’s Fiscal Deficit in 2025 - Current Scenario

As of December 2025, the Government of India is tightening its fiscal policy. It has set the fiscal deficit at 4.4% of GDP, and this is lower than 4.8% in FY 2024–25. This drop has happened because government income is growing faster than government spending.

The Union Finance Minister Nirmala Sitharaman has led this shift through the Union Budget. The government has increased tax collections and it has also controlled expenses. As a result, borrowing needs have reduced.

For the next financial year, the government of India aims to keep the fiscal deficit below 4.5% of GDP. By March 2031, the government also wants the debt-to-GDP ratio to stay close to 50%.