Fiscal Challenges for 2026
The year 2026 could present significant financial challenges for both the Centre and state governments in India. The data from April-November 2025-26 indicates a rising fiscal deficit, pointing towards economic strains.
Centre's Financial Situation
- As of April-November 2025-26, the Centre's fiscal deficit was 62.3% of the full-year budget estimate, higher than the 52.5% during the same period in 2024-25.
- The primary deficit, excluding interest payments, reached 78.9% of the annual target, compared to 41.8% in the previous year.
- The pressure primarily stems from tax revenue shortfalls, with only 49.1% of the budgeted collections achieved by November, affected by GST rate cuts.
- The Centre may need to cut expenditures to adhere to its deficit targets.
State Governments' Financial Strain
- States like Andhra Pradesh and West Bengal have resorted to raising funds through government securities at higher interest rates, despite RBI's rate cuts.
- The combined fiscal deficit of states increased from 2.4% to 3.2% of GDP between 2018-19 and 2024-25, with the primary deficit rising from 0.8% to 1.5%.
- Some states have liabilities exceeding 30% of GDP, with Punjab, Himachal Pradesh, West Bengal, Bihar, Kerala, and Rajasthan at over 35%.
- The bond markets may start differentiating fiscally responsible governments from those with reckless spending.
Overall Economic Context
- India has moved past the twin balance sheet crisis, improving corporate and bank financial health.
- A weak government balance sheet could hinder growth by limiting private sector borrowing opportunities.
Government Spending Patterns
- Government spending is increasingly directed towards short-term electoral gains through freebies and cash transfers rather than traditional public goods and infrastructure.
- This approach has gained widespread acceptance among political parties, yet may not be sustainable long-term.
Ultimately, 2026 could mark a turning point where fiscal responsibility prevails, ensuring long-term economic stability.
