Impact of Military Conflicts on Government Finances

The military conflicts between neighboring countries, specifically India and Pakistan, have historically impacted the financial health of their governments significantly. A prime example is the Kargil war that affected India’s fiscal calculations in 1999-2000.

Fiscal Impact of the Kargil War

• The fiscal deficit target for 1999-2000 was set to be reduced to 4% of GDP, but the actual fiscal deficit resulted in 5.2%.
• There was a 7% excess in expenditure and a 4% shortfall in tax collections due to the conflict.
• The war was fought during political uncertainty, under a caretaker government prior to the general elections.

Current Conflict and Financial Outlook

The recent military flare-up in May 2025 may similarly impact the financial plans of the government, despite the current political stability.

• The projected fiscal deficit for 2025-26 is 4.4% of GDP, relying on an 11% net tax revenue growth and a 7% containment in expenditure growth.
• The pace of economic activity may slow, affecting revenue receipts, although this could be offset by higher transfers from the Reserve Bank of India (RBI).

Revenue Collection and GST

• There exists a revenue cushion in GST collections due to the extension of the compensation cess till March 2026.
• From July 2022 to March 2025, an estimated collection of ₹3.82 trillion should cover the loan repayment facilitated by the RBI.
• In case of revenue shortfall, excess collections could be used to meet the deficit, benefiting both the Centre and the states.

Expenditure and Defence Preparedness

The conflict may necessitate increased defence spending, impacting the government’s expenditure plans.

• Defence expenditure has historically been tightly controlled, with a 3.4% increase in 2024-25 and a planned 7.6% increase for the current year.
• With the conflict at the border, there's a push to raise defence spending closer to the 2.4% of GDP as in 1999.

Implications for Fiscal Consolidation

• To meet the fiscal deficit target for 2025-26, the government may need to consider altering expenditure composition or pausing the fiscal deficit reduction plan.
• Total debt is expected to reduce to 56% of GDP in 2025-26, down from 57% in 2024-25.
• Allowing minor slippage in deficit reduction may be preferable to cutting capital expenditure, which has a growth-multiplier effect.

These observations reflect the writer's personal views and do not necessarily align with the opinions of www.business-standard.com or the Business Standard newspaper.