Is the Government Gaining Extra Room to Spend on Defence Due to a Strong Fiscal Position?

New Delhi, May 31 (NationPress) With the emerging robust fiscal position in 2025-26, the government is anticipated to have an increased capacity to manage unexpected defence expenditures, as outlined in a report by Bank of Baroda released on Saturday.

This observation is crucial against the backdrop of rising tensions with Pakistan, particularly following the Pahalgam terror attack and Operation Sindoor.

The report's forecast for FY26 indicates that the government has set a fiscal deficit target of 4.4 percent of GDP, based on an expected growth in nominal GDP of 10.1 percent.

“We project this growth to reach approximately 11 percent, as we anticipate real GDP to be between 6.4-6.6 percent this year,” the report mentions. This anticipated growth is expected to create additional fiscal flexibility for the government.

“With a strong start to FY26, as evidenced by April 2025 data showing revenue receipts at 7.5 percent of the budgeted target—up from 6.8 percent last year during the same period—we are optimistic that the government will meet its revenue objectives this year. The income tax reduction will also stimulate consumption, thereby enhancing indirect tax receipts,” the report elaborates.

On the expenditure side, in line with historical trends, the government has initiated front-loading of spending from the first quarter, with capital expenditure in April already at 14.3 percent of the FY26 budget estimate, compared to 8.9 percent last year during the same timeframe, the report explains.

Despite this, the fiscal deficit remains at 11.9 percent of the FY26 budget estimate, compared to 13 percent last year, indicating the government is on track to meet its fiscal deficit goals for the current financial year, the report adds.

It also highlights that the Centre's fiscal deficit was at 4.8 percent for the financial year 2024-25, aligning with the government's revised forecasts. The better-than-expected growth in nominal GDP, estimated at 9.8 percent against a revised estimate of 7.6 percent for FY25, along with some expenditure trimming, enabled the government to achieve its targets. Revenue growth experienced some slowing, particularly in revenue receipts.

Within revenue receipts, income tax and GST collections faced some shortfalls. However, corporate tax collections and non-tax revenue growth surpassed FY25 revised targets. On the expenditure side, while capital spending exceeded the revised FY25 budget target, revenue expenditures fell short, but not due to subsidies, as both food and fertilizer subsidies were in line with budget projections, the report noted.

Key ministries with spending above budget included consumer and food affairs, road & transport, rural development, home affairs, and renewable energy.