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 popular demands from corporates and institutions from the government from the Union Budget 2026-27 is to keep the fiscal deficit in check. Now, fiscal deficit is the gap due to the revenue flows being insufficient to meet the revenue and capital outlays of the central government. That gap has to be funded, and it is normally funded by borrowings. Normally, fiscal deficit is measured as a percentage of nominal GDP and the figure for FY26 has been pegged at 4.4%. That is a sharp reduction from 9.2% in FY21, when the spending pressure on the government had peaked in the aftermath of the COVID pandemic. The big question is whether the government can hold the fiscal deficit at 4.4% this fiscal year.

A very high ratio of fiscal deficit to GDP has several negative implications. For starters, it tends to weaken the rupee and is also viewed negatively by foreign portfolio investors (FPIs) and global rating agencies (like S&P, Moody’s, Fitch). That is why, the government had adopted the Fiscal Responsibility and Budget Management (FRBM) Act, which sets clear targets for fiscal deficit as a percentage of nominal GDP. India has largely maintained that fiscal discipline, barring some occasional aberrations. Now, the expectation for FY27 is that the fiscal deficit to GDP would be further reduced to 4.2%. For now, let us focus on the FY26 update to the fiscal deficit number, as of end December 2025.

HONEY, I SHRUNK THE FISCAL DEFICIT IN DEC-25

That does sound rather strange. How can the fiscal deficit shrink in any month. That is more to do with accounting. December is the month when advance taxes are collected and is the deadline by which assessees with taxable income have to pay up the advance tax. However, the advance taxes represent the direct tax revenues for the next one quarter. What the government has done this year is to front-load and show the entire advance tax revenues as flows in the month of December, which is actually incorrect. They did a similar thing in September 2025 and also after the RBI dividend payout in May 2025. That cut fiscal deficit.

For the month of December 2025, the recording of total advance tax flows led to the fiscal deficit actually reducing by ₹1.21 trillion. As a result, the government has only covered 54.5% of the fiscal deficit for the full year as of the end of December. Such statements can be misleading. Showing the entire advance tax revenues in December means that we are going to run short of revenues in January and February. We saw a similar thing happen previously during the year, so we have to be prepared for a sharp escalation of the fiscal deficit in January and February. Also, the government is yet to pay out the tax refunds for FY2024-25, with most of the large refunds still pending. We have to wait and watch!

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)

Here are key takeaways from the updated fiscal deficit story for FY26.

• This year, the revenue flows have been going slow compared to the full year targets. The revenue receipts at 72.5% of full year target is slightly misleading. As we mentioned earlier, the entire advance tax flows have been shown as revenues in the month of December itself, so one can expect a slowdown in the upcoming months of January and February 2026. That has to be factored in.
• A special word on net tax revenues at 68.3% of the full year target. This actually does not disclose two realities. Firstly, we already spoke about the entire quarterly advance taxes being shown in December. Secondly, most of the large refunds of FY25 are yet to be paid out and once that is paid, we could see the net tax revenues coming down substantially. The actually net tax flows have been extremely disappointing.
• The government appears to have deliberately gone slow on the revenue spending front, which now appears to match with the revenue flows. However, we could still see bunching of revenue spends in the last quarter. Also, the capital expenditure room is now getting constrained, although the government ahs spent liberally on capex in the month of December 2025. This has implications for GDP growth.
• The fiscal deficit stands at 54.5% of full year target and revenue deficit stands at just 21.8% of the full-year targets. However, we have to wait for the next couple of months to get the real picture; since by then the outflows with catch up with the advance tax inflows, and the government should have cleared most of the tax refunds of FY25. That will give a good picture of whether the 4.4% fiscal deficit target for FY26 is doable.

Scratch the surface, and there are signs of fiscal deficit swelling this year. The problem is not on the spending side, but the weak revenue flows.

5 TAKEAWAYS FOR INDIAN INVESTORS FROM FISCAL DEFICIT DATA

For investors, it is not just the fiscal deficit, but the composition of the fiscal deficit and also the revenue deficit that matter. Here are some key takeaways for investors.

• Tax revenues have been meaningfully slower in FY26 and the current tax data must be seen in the light of the fact that the entire advance tax collections in December have been recorded in December itself. We could see slower inflows in Jan-Feb 2026.
• While the flows have slowed, most outflows are non-negotiable. The government needs more revenues to boost capex from the current levels to the range of ₹13-15 trillion. However, that may not be feasible if one considers the tax refunds still to be paid out.
• There is a strong possibility of the fiscal deficit spilling over beyond the targeted 4.4%. A lot will depend on the Union Budget 2026-27, where the markets are looking forward to new and additional sources of revenue flows for the government.
• For the central government it will be a tightrope walk between fiscal prudence and the need to spur growth. It obviously needs to look at more sources of revenue flows and more effective monetization of assets like land banks, infrastructure, and gold stocks. It is hoped that the consumption effect will offset the direct tax and GST cuts.
• From a stock market perspective, low fiscal deficit is always welcome as it keeps FPIs interested and also the rating agencies in good humour. However, in India’s specific case (due to Trump tariffs), there is a case to boost growth through pump priming (using fiscal deficit as a tool of growth); although government is unlikely to buy that line.

The fiscal deficit does show signs of spilling over beyond 4.4% of GDP in FY26, although the government is likely to stick to 4.2% target for FY27. The bigger challenge for the government would be to give a big boost to net tax revenues and to spur capital spending.

 

Summary One of the big challenges for the government on the fiscal deficit front is that two of its expenditure items are likely to escalate in the coming months. Firstly, defence outlays are likely to grow substantially in this budget due to the rising geopolitical risks and the position of India at the crossroads of geographical strife. The other outlay that will increase is on food and fertilizer subsidies. Both are expected spill over as the government is trying hard to ensure that food prices are kept in check. Amidst this focus on fiscal deficit, the budget may also initiate a shift in how one looks at India’s debt. Today, the focus and guidance is purely on fiscal deficit. However, the centre is now going to take a broader view of debt, which will also include guidance on debt/GDP ratio. Government is likely to target reducing this ratio from the current 58% to 50% by year 2032. Another positive is that the total capex outlay including state capex spending and PSU capex spending is already well above 5% of GDP. That is the real positive macro takeaway!