India’s macro-credibility will depend on whether fiscal consolidation, capex priorities, and deficit financing are aligned with growth and debt sustainability
Macro-credibility is the set of signals that tell households, firms, and investors whether fiscal numbers are believable. It also conveys whether today’s spending improves tomorrow’s growth capacity. For India, the Union Budget is both a macro-credibility anchor and a development instrument. Thus, when analysing the budget, the right question is not only “How much is spent?”, but “What is it spent on, how is it financed, and how resilient are the numbers if growth or revenues disappoint?”
The Union Budget 2025–26 extended the post-pandemic normalisation in headline deficits. The fiscal deficit was budgeted at 4.4 percent of GDP in 2025–26, down from 5.6 percent in 2023–24 (Actuals) and 4.8 percent in 2024–25 (Revised Estimates). The revenue deficit was budgeted at 1.5 percent of GDP, the primary deficit at 0.8 percent of GDP, and the effective revenue deficit (revenue deficit net of grants for creation of capital assets) at 0.3 percent of GDP.
Two divergences matter for credibility. First, net tax receipts are behind last year’s pace (49.1 percent of Budget Estimates vs 55.9 percent in the corresponding period) Second, capex execution is ahead of last year (58.7 percent vs 46.2 percent).
These ratios are encouraging, but credibility depends on the underlying arithmetic. The Budget note cited nominal GDP for 2025–26 at INR 356.98 lakh crore (about 10.1 percent above the revised estimate for 2024–25). It should be noted that fiscal ratios look better when nominal growth is strong, and worse when it is not. Thus, consolidation must be read as an amalgam of the numerator (revenues and spending quality) and the denominator (nominal GDP).
Figure 1: Union Government Deficit Trends (percent of GDP).
Source: Budget at a Glance 2025–26
Two divergences matter for credibility. First, net tax receipts are behind last year’s pace (49.1 percent of Budget Estimates vs 55.9 percent in the corresponding period). Second, capex execution is ahead of last year (58.7 percent vs 46.2 percent). This mix is not automatically bad — it can reflect front-loading of investment — but it makes the deficit path more sensitive to whether the tax shortfall is timing-related or structural. The Controller General of Accounts also cautions that in-year fiscal deficit shares are affected by timing mismatches in receipts and spending, and may be offset later in the year. Still, the mid-year profile is a useful stress test for the realism of the Budget arithmetic.
Table 1: Mid-year Credibility Check (April–November 2025–26)
| Item | BE 2025–26 (₹ cr) | Actuals up to Nov (₹ cr) | % of BE | % of BE (COPPY) |
| Revenue receipts | 34,20,409 | 19,10,312 | 55.9% | 59.8% |
| Net tax revenue | 28,37,409 | 13,93,946 | 49.1% | 55.9% |
| Non-tax revenue | 5,83,000 | 5,16,366 | 88.6% | 78.3% |
| Capital expenditure | 11,21,090 | 6,58,210 | 58.7% | 46.2% |
| Interest payments | 12,76,338 | 7,45,765 | 58.4% | 56.6% |
| Fiscal deficit | 15,68,936 | 9,76,671 | 62.3% | 52.5% |
| Revenue deficit | 5,23,846 | 3,57,388 | 68.2% | 61.5% |
| Primary deficit | 2,92,598 | 2,30,906 | 78.9% | 41.8% |
Source: CGA Monthly Accounts
Thus, Table 1 shows that the consolidation story now depends on execution: capex is front-loaded, while net tax receipts are lagging the corresponding period. The analytical question is therefore not “capex versus consolidation”, but whether the fiscal path remains consistent with the debt arithmetic that links growth, borrowing costs, and the primary balance. A simple identity sits behind any fiscal plan. Debt-to-GDP stabilises when the primary balance (the fiscal balance excluding interest payments) is consistent with the gap between the effective interest rate and nominal GDP growth, given the existing debt stock.
Two numbers anchor spending quality: the interest bill (a pre-committed charge) and effective capital expenditure (the growth-facing component). Spending quality should be assessed against the fact that interest payments were budgeted at INR 12.76 lakh crore in 2025–26. Relative to the revenue base, this is a hard constraint. Using Budget aggregates, interest payments are roughly 37 percent of revenue receipts in 2025–26. When interest absorbs this much revenue, shocks force either abrupt spending compression or higher borrowing, both of which can damage credibility.
This is also why any “capex push” must be judged alongside the interest bill. If higher spending raises the risk premium on government borrowing, interest costs can grow faster than revenues. That can crowd out the very development spending the Budget aims to protect. The quality of spending is inseparable from the quality of financing. The 2025–26 Budget also preserved a capex orientation. Total capital expenditure was budgeted at INR 11.21 lakh crore. The Budget also planned effective capital expenditure (capex plus grants for creation of capital assets) of INR 15.48 lakh crore. This broader metric matters because part of “growth spending” is grants for asset creation, not just the Union’s own capital outlay.
Using Budget aggregates, interest payments are roughly 37 percent of revenue receipts in 2025–26. When interest absorbs this much revenue, shocks force either abrupt spending compression or higher borrowing, both of which can damage credibility.
Capex becomes growth-enhancing when project selection is disciplined, execution is timely, and assets are maintained. Public investment tends to have larger growth effects when projects are well-selected, and implementation capacity is strong, while multipliers fall when efficiency is weak. The mid-year data show that capex is being executed faster than last year, so the next credibility question is not allocation but delivery quality and completion.
Figure 2 on spending composition clarifies the limits of short-run discretion. In 2025–26, 22 percent of expenditure goes to the states’ share of taxes and duties, 20 percent to interest payments, and 8 percent to defence. Major subsidies are 6 percent, while “finance commission and other transfers” are 8 percent. These components are not easily adjustable in the short run. Thus, discretionary space sits mainly in schemes, capital outlay, and the design of transfers. This is why “quality of spending” is about programme productivity and execution, not about one-off cuts.
Figure 2: Where the rupee goes (Budget 2025–26)
Source: Budget at a Glance 2025–26
The revenue deficit flags whether the government is borrowing to fund current consumption. The effective revenue deficit refines this by netting out revenue grants that create capital assets. In 2025–26, the effective revenue deficit is budgeted at 0.3 percent of GDP, far below the 1.5 percent revenue deficit. The implication is not that all revenue spending is bad, but that the Budget seeks to ensure that a larger share of borrowing supports asset creation. The credibility test is classification and outcomes: are “asset‑creating” grants correctly booked, and do they produce usable assets?
Credibility also depends on how the deficit is financed. The Budget’s fiscal deficit financing is shown mainly through net debt receipts, with G‑sec market borrowing as the largest component. It also shows net borrowing through T‑bills as zero in BE 2025–26. Compared to heavy reliance on short-term borrowing, a market-based borrowing programme is easier to monitor and price. However, it also makes credibility sensitive to bond-market conditions. If inflation surprises or growth slows, the risk premium can rise. That would lift debt servicing costs and reduce fiscal space. This is why the primary deficit and revenue deficit metrics are worth tracking through the year.
Credibility in 2026–27 will be judged less by headline targets and more by delivery quality, revenue realism, and financing conditions.
The mid-year run-rate points to three measurable credibility tests for the next Budget cycle. First, whether the tax shortfall seen up to November proves to be a timing issue or a durable gap, which will determine how much of the consolidation can rely on the denominator effect. Second, whether capex front-loading translates into completed assets and service improvements, rather than only higher outlays. Third, whether the interest burden remains contained relative to revenues, since that ratio determines how much fiscal space is available for development spending. Thus, credibility in 2026–27 will be judged less by headline targets and more by delivery quality, revenue realism, and financing conditions.
Arya Roy Bardhan is a Junior Fellow with the Centre for New Economic Diplomacy at the Observer Research Foundation.
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Arya Roy Bardhan is a Junior Fellow at the Centre for New Economic Diplomacy, Observer Research Foundation. His research interests lie in the fields of ...
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