Federal Budget Deficit Reaches 17.9%
In the first quarter of the 2025-26 fiscal year, the fiscal deficit stood at a significant Rs 2,80,732 crore, marking an increase from the corresponding period in the previous year, according to data released by the Controller General of Accounts (CGA).
The higher fiscal deficit is primarily due to a sharp increase in government expenditure, especially capital expenditure, outpacing the fiscal gains from a higher dividend from the Reserve Bank of India (RBI) and reduced tax collection.
The Centre's total expenditure in Q1 of 2025-26 was 24.1% of the budget estimate, higher than 20.1% in the same period last year. Capital expenditure jumped 52% year-on-year to ₹2.75 lakh crore, and revenue expenditure increased by 20% to ₹9.47 lakh crore. This spending growth widened the fiscal deficit to ₹2.81 lakh crore (17.9% of the annual target) by June 2025, compared to ₹1.36 lakh crore a year earlier.
The net tax revenues dropped 2% year-on-year to ₹5.40 lakh crore by June, showing weaker direct tax collections in particular, which pulled down gross tax revenue performance despite a robust pace of devolution to states.
However, the higher fiscal deficit was partially offset by a record ₹2.69 lakh crore dividend transfer from the RBI, which represented a 33% increase in non-tax revenues.
Despite the first quarter being worse than the previous year, experts expect the government to meet its target of a 4.4% fiscal deficit for the full year 2025-26. They believe that a higher-than-expected RBI dividend played a key role in containing the impact of increased capital expenditure during the quarter. Reduced tax collection is also expected to help the government achieve its fiscal deficit target.
It's important to note that the World Gold Council (WGC) has revised down 2025 gold demand due to a 12% fall in consumption in the first half of 2025-26. This could potentially impact the government's revenue from gold imports and sales.
In comparison, the fiscal deficit for the corresponding period in 2024-25 was at 8.4% of the Budget Estimates (BE) of that year. The Centre's net tax revenue up to June 2025 was Rs 5.4 lakh crore, or 19% of the corresponding BE 2025-26 of total receipts.
As we move forward, it will be interesting to see how the government balances its spending priorities with the need to reduce the fiscal deficit and maintain economic stability.
Businesses seeking investments might find it challenging in light of the widened fiscal deficit due to increased government spending in finance. The higher-than-expected dividend from the Reserve Bank of India (RBI) could potentially aid the government in balancing its finances, ensuring economic stability.
