Budget 2026: Deficit target met, but quality of spending took a beating

In the run-up to the Budget, there was speculation that the deficit targets set for the current year might not be met thanks to serious shortfalls in the expected tax revenues. Yet, the revised estimates for 2025-26 show that the target of 4.4% of GDP set for the fiscal deficit is likely to be met.How was this achieved? The short answer is that it was made possible partly through higher than budgeted non-tax revenues, but more importantly through a sizeable cut in expenditure, particularly in capital expenditure, which is broadly investment in creating assets for the future. The tax revenues had been budgeted at Rs 28.4 lakh crore but are now estimated to reach only Rs 26.7 lakh crore, a shortfall of over Rs 1.6 lakh crore. With tax revenues, taxes on corporate incomes have yielded slightly more than expected but those on personal incomes are much lower than initially budgeted, Rs 13.1 lakh crore RE against Rs 14.3 lakh crore in BE. Similarly, while excise and customs duty collections were higher than budgeted, GST revenues are down from Rs 11.8 lakh crore in BE to Rs 10.5 lakh crore in RE.Against this decline in tax revenues, non-tax revenues are now estimated to reach Rs 6.7 lakh crore against the budgeted Rs 5.8 lakh crore, somewhat narrowing the gap. Most of this is in the form of higher than anticipated dividends and profits, Rs 3.8 lakh crore against Rs 3.3 lakh crore. The bulk of this, in turn, is from RBI.But the real adjustment that has kept the fisc on track is the cut in total expenditure from Rs 50.7 lakh crore in the BE for the current year to Rs 49.7 lakh crore in the RE. The Centre's expenditure on capital account is now estimated to be about Rs 30,000 crore lower than the BE of Rs 11.2 lakh crore. An even sharper fall is in the grants in aid to states for creation of capital assets. These were budgeted at Rs 4.3 lakh crore but are down to Rs 3.1 lakh crore in the RE.The result is that effective capital expenditure by the Centre - which includes the Centre's own capital expenditure and the grants in aid it gives states for creating capital assets - is down sharply from almost Rs 15.5 lakh crore in the BE to just over Rs 14 lakh crore in the RE. As a share of GDP, the figure is down from 4.2% in 2023-24 to 3.9% in RE 2025-26.What that means is that while the headline deficit figure might appear to be unchanged from what was budgeted, the quality of expenditure has been distinctly worse than planned. Perhaps, that explains why the budget estimates for 2026-27 project growth of under 8% in both tax revenues and total expenditure despite nominal GDP being assumed to go up by 10%. However, effective capital expenditure is slated to rise over 22%. Could that be a tall order? Past experience suggests it could be.