- The Budget targets FY26 deficit at -4.4% of GDP, half from Covid highs.
- We find the fiscal consolidation roadmap credible.
- A forward-looking roadmap was outlined, to align deficit targets and debt levels.
- Implications for markets: We expect the borrowing program to be neutral for the bond markets.
- Focus will be on the RBI MPC rate review next; we expect a rate cut.
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In essence
The Budget delivered on a dual mandate, supporting producers via improving the ease of doing business and lowering regulatory impediments, while consumers received tax relief along with measures to boost employment in the medium-term. Amongst the key focus areas were agriculture, MSMEs, clean tech industries, labour intensive segments (like toys, footwear), power, shipping, amongst others. In all, the Budget sought to steady the growth ship, by focusing on key engines i.e., consumption, capital investments, and external trade. Despite these wide-ranging priorities, there was an uncompromising focus on fiscal consolidation.
The Budget faces a few trade-offs, as slowing growth is at odds with faster fiscal consolidation. Encouragingly, lower revenue deficit (see table) will allow for consolidation without compromising on expenditure. Along our expectations, a forward-looking roadmap was also outlined, which sought to align the deficit targets with the debt levels by FY30. As we had highlighted in India: Is it time to expand the fiscal target framework?, there are several moving parts in plans to lower det levels.
Fiscal math
Consolidation and medium-term glide path. The central government (GOI) remained committed to consolidating finances, with the deficit targets narrowing to -4.8% of GDP in FY25 and -4.4% of GDP (compared to indicative pegged -4.9% and -4.5% earlier). In addition to the near-term focus, a medium-term follow through was demonstrated by aligning deficit and debt levels. Under the FRBM arrangement, the GOI plans to keep fiscal deficit in each year (from FY 2026-27 till FY 2030-31) such that the Central Government debt is on declining path to attain a debt to GDP level of about 50±1 per cent by 31st March 2031 (the last year of the 16th Finance Commission cycle). We had discussed this likelihood in our 2025 Outlook.
Borrowings likely to be non-disruptive.
Gross borrowings were a bit higher than market expectations at INR 14.8trn, but closer to our estimate. This reflects the rise in redemptions at INR 3.3trn, net of which borrowings stand at INR 11.5trn. Of note, redemptions are higher in FY26 on account of Covid-19 pandemic led borrowings that are due for repayment in 2025. As a pre-emptive measure, the government has executed buybacks and switches in FY25 to address part of these loans, to ease pressure on the bond markets and prevent a large concentration of repayments in FY26. These repurchases are intended to lower the centre’s liabilities and strengthen the fiscal position.
North block delivers, Mint street (RBI) is next
The Reserve Bank of India monetary policy committee (RBI MPC) is scheduled will announce its rate decision on February 7. Slew of liquidity measures introduced last month is expected to narrow the shortfall, improving policy transmission as the February rate review approaches. Providing liquidity is important, as is easing the price of that liquidity. Amidst decelerating inflation, a brief respite from a one-way dollar rally, signs of soft domestic demand, and ongoing fiscal consolidation, onus is on the monetary policy to assume a growth supportive tone. New members of the MPC – three external members joined in Oct24, new Governor assumed office in Dec24 and Deputy Governor in Jan25 – have openly conveyed little on their policy bias, though recent actions suggest that the path is being paved for monetary easing. We expect a 25bp cut at the February meeting, marking a start to a shallow rate cut cycle.
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