The headline news from the provisional actual numbers released this week for the Union government’s finances during 2025-26 will understandably be about the fiscal deficit. For the fifth year running, Finance Minister Nirmala Sitharaman has managed to stick to her fiscal deficit target and, in some years, she has even improved upon it. Barring the first two years of her tenure as finance minister, when her actual fiscal deficit figures exceeded her set targets.
Sitharaman has stayed true to her promise of fiscal consolidation in all subsequent years. The provisional actual fiscal deficit at 4.4 per cent of gross domestic product (GDP) in 2025-26 confirms that trend.
But an equally significant development noticeable in these numbers is a mild relaxation in the government’s tight grip on expenditure that it maintained after the Covid pandemic subsided. If the ongoing challenges before the Indian economy in the wake of the West Asian crisis are any indication, the government may have to loosen its purse strings a little more this year.
Remember that the government’s aggregate expenditure rose sharply immediately after the Covid-19 pandemic. From about Rs 27 trillion, or 13.4 per cent of GDP in 2019-20, expenditure jumped by over 30 per cent in one year to Rs 35 trillion, or 17.7 per cent of GDP, in 2020-21. To place this rise in context, the expenditure growth in 2019-20, even without the impact of Covid, was about 16 per cent over the previous year.
In the following few years, however, the government’s annual expenditure growth moderated to single digits except in 2022-23. As a percentage of GDP, the Union government’s total expenditure declined in each of these years, reaching 14.2 per cent in 2025-26. But expenditure growth in the last two years has revealed a mild pickup. The annual rise in total expenditure in 2025-26 was 5.4 per cent, compared to 4.7 per cent recorded in 2024-25.
The change in the expenditure mix is also a trend that cannot be easily ignored. Capital expenditure measured as a percentage of GDP rose steadily until 2024-25. From 1.67 per cent of GDP in 2019-20, capital expenditure rose to 3.31 per cent in 2024-25. But 2025-26 was the first year when that share saw a small decline to 3.1 per cent of GDP. In terms of annual growth, it fell to 1.62 per cent in 2025-26, compared to growth rates ranging from 11 per cent to 39 per cent in the previous five years.
Interestingly, revenue expenditure growth witnessed a reverse trend. After the Covid-period increases, revenue expenditure was reined in with the annual growth hovering at 1.2 per cent in 2023-24 and 3.12 per cent in 2024-25. But that changed in 2025-26, when revenue expenditure was allowed to rise by 6.4 per cent, even though as a percentage of GDP, it remained around 11 per cent — a sharp reduction from about 18 per cent recorded in the Covid year of 2020-21.
What happened on the revenue front is even more interesting. The Union government has made little headway in improving its non-tax receipts. Non-tax revenue has hovered between 1 per cent and 1.9 per cent of GDP in the last seven years. Nor has any progress been seen in diversifying the sources of the government’s non-tax revenue. It continues to be heavily reliant on the surplus that the Reserve Bank of India transfers to the Union government. In the last three years, the share of RBI surplus in the government’s non-tax revenue has stayed between 42 and 52 per cent. This dependence has many other implications, and the only way forward for the government is to explore newer areas for mobilising non-tax revenue.
Even more striking are tax revenue trends, which should raise many an eyebrow. At Rs 40.24 trillion, gross tax collections in 2025-26 grew by only 6 per cent over the previous year. This was lower than the nominal GDP growth of 8.6 per cent registered last year. Corporation tax helped the growth rate in gross tax collections, rising by 11 per cent to Rs 11 trillion in 2025-26. But quite worryingly, the individual income-tax collections last year at Rs 11.83 trillion remained almost the same as in 2024-25. What went wrong?
Note that the revised estimate for individual income-tax collections during 2025-26 had placed the number at Rs 13.12 trillion. But the provisional actual estimate brought it down to the same level that prevailed in 2024-25. Was it because of the government’s decision to reduce the effective tax incidence on individuals or was it also because of a sharp dip in collections under securities transaction tax?
In the Budget for 2025-26, the government increased the income-tax rebate limit for resident individuals under the new tax regime, resulting in those with an annual total income of up to Rs 12 lakh not having to pay tax. This tax-free limit was Rs 12.75 lakh for salaried taxpayers in view of the standard deduction of Rs 75,000. In addition, marginal relief available under the old tax regime was extended to the new tax regime for incomes marginally higher than Rs 12 lakh.
Significantly, increasing the income-tax rebate to incomes of up to Rs 12 lakh annually essentially meant that about 10 million taxpayers, who were earlier paying income tax ranging from Rs 20,000 to Rs 80,000, were now paying no tax. This meant that the tax base for individual taxpayers was shaved off by almost 12 per cent.
The increase in the income-tax rebate limit was introduced in the new tax regime from 2023-24, resulting in resident individuals with total income of up to Rs 7 lakh not paying any income tax. This principle was extended to the 2025-26 Budget. The move was aimed at pleasing the middle class in the country, but it ran the fiscal risk of losing a significant chunk of the tax base (they may be filing returns, but they are not required to pay any tax). Poor collections of securities transaction tax might also have contributed to stagnant income-tax receipt in 2025-26. But that must have played a small role.
The expenditure and revenue trends in the provisional actual numbers for 2025-26 have obvious lessons for the government that now faces difficult fiscal challenges in 2026-27. Reining in expenditure to keep a check on the deficit is no longer an option. Expenditure pressures are bound to rise in 2026-27 and, as in the Covid-19 year, the government should be willing to consider accommodating a rise in its expenditure. The fiscal deficit should be contained through a tight vigil on subsidies by allowing necessary increases in retail prices of commodities like petrol, diesel and fertilisers. More importantly, given the way income-tax collections took a hit last year, there is a need to consider phasing out some of the benefits under the income-tax rebate scheme.
AK Bhattacharya is the Editorial Director of Business Standard. He tweets @AshokAkaybee. Views are personal.