Fiscal deficit falls by ₹1.21 Trillion in December 2025

31 Jan 2026 , 05:23 PM

FISCAL DEFICIT STORY FOR FY26 – WHY IT MATTERS?

One of the key demands from corporates and institutions ahead of the Union Budget 2026–27 is that the government should keep the fiscal deficit under control. The fiscal deficit arises when the government’s income is not enough to meet its spending, including both revenue and capital expenditure. This shortfall is usually met through borrowings.

Fiscal deficit is measured as a percentage of nominal GDP. For FY26, the government has set this figure at 4.4 percent, which is a significant improvement from 9.2 percent in FY21, when government spending rose sharply due to the COVID pandemic.

The important question now is whether the government can actually maintain the fiscal deficit at 4.4 percent in FY26. A high fiscal deficit can have negative effects. It can weaken the rupee and make investors and global credit rating agencies such as S and P, Moody’s, and Fitch uncomfortable.

To ensure fiscal discipline, India follows the Fiscal Responsibility and Budget Management Act, which lays down targets for controlling the fiscal deficit. Except for a few exceptional periods, India has largely adhered to these norms.

Looking ahead, the expectation for FY27 is that the fiscal deficit will be reduced further to 4.2 percent of GDP. For now, the focus is on how the fiscal deficit has progressed in FY26, based on data available up to December 2025.

FISCAL DEFICIT SHRINKS IN DEC-25

At first glance, it may seem surprising that the fiscal deficit has fallen in December. Normally, the fiscal deficit does not reduce sharply in a single month. This change has more to do with accounting treatment than with an actual improvement in government finances.

December is the month when advance taxes are collected. These taxes are meant to fund government spending over the next few months. However, this year the government has shown the entire advance tax collection as revenue for December itself. This makes the fiscal numbers look better for the month, even though the income actually relates to a later period.

The government has used similar methods earlier in the year. In September 2025 and after receiving the RBI dividend in May 2025, revenues were recorded in a way that temporarily reduced the fiscal deficit.

Because of this accounting approach, the fiscal deficit in December 2025 fell by ₹1.21 trillion. As a result, by the end of December, the government had used only 54.5 percent of its full-year fiscal deficit target. However, this picture can be misleading.

Recording all advance tax income in December means there will be lower tax collections in January and February. This could lead to a sharp increase in the fiscal deficit in the coming months. In addition, the government still has to pay large pending tax refunds for FY2024–25, which will further put pressure on the deficit.

In short, the current improvement in the fiscal deficit may not be sustainable, and the real situation will become clearer in the next few months.

BREAK-UP OF FISCAL DEFICIT – FY26 TARGETS AND 9-MONTHS ACTUALS

Here are government receipts, expenditures, and fiscal deficit for the 9 months of FY26. The table also captures the target achieved as of December 2025.

Item Heads	Budget Estimate FY26 (₹ in Crore)	Actual (Apr-Dec) (₹ in Crore) #	Actual to Target (% achieved)
Revenue Receipts	34,20,409	24,79,109	72.5%
Tax Revenue (Net)	28,37,409	19,39,254	68.3%
Non-Tax Revenue	5,83,000	5,39,855	92.6%
Non-Debt Capital Receipts	76,000	46,047	60.6%
Total Receipts	34,96,409	25,25,156	72.2%
Revenue Expenditure	39,44,255	25,93,063	65.7%
Capital Expenditure	11,21,090	7,87,935	70.3%
Total Expenditure	50,65,345	33,80,998	66.7%
Fiscal Deficit	15,68,936	8,55,842	54.5%
Revenue Deficit	5,23,846	1,13,954	44.1%
Primary Deficit	2,92,598	-55,217	-18.9%

Data Source: Controller General of Accounts (# – 9 months data)

Impact on Indian Investors

For investors, the apparent improvement in the fiscal deficit may be temporary rather than real. If the deficit rises sharply in January and February, markets could react negatively. This may lead to short term volatility in equity markets, especially in interest rate sensitive sectors like banking, real estate, and infrastructure.

A higher fiscal deficit can also push up government borrowing. This usually puts upward pressure on bond yields, which means existing bond prices may fall. Debt mutual funds could see short term pressure, while new investors may benefit from higher yields.

Foreign investors closely track fiscal discipline. If they believe the numbers are being supported by accounting adjustments rather than genuine improvement, it could affect foreign portfolio inflows, and that may add pressure on the rupee.

Impact on Taxpayers

For taxpayers, this situation mainly affects cash flows and future tax treatment, rather than immediate tax rates. Since advance taxes have already been collected, taxpayers may see more delays in refunds, especially for FY2024–25, as the government manages its cash position.

If fiscal pressure increases, the government may become more cautious on spending or look for additional revenue measures in the future. This could mean fewer tax concessions, stricter compliance, or slower rollout of taxpayer friendly reforms.

In the longer term, consistently high fiscal deficits can lead to higher interest rates in the economy. That raises borrowing costs for home loans, car loans, and business loans, indirectly affecting households.

For now, investors should be prepared for near term fiscal noise and market volatility, while taxpayers should expect refund delays rather than higher taxes immediately. The real impact will depend on how the fiscal numbers look by the end of the financial year and whether the government can manage the deficit without aggressive borrowing.