India’s fiscal dynamics have improved at the aggregate level post-pandemic, with a most notable shift in the quality of spending
NEW DELHI — India’s fiscal dynamics have improved at the aggregate level post-pandemic, with a most notable shift in the quality of spending, which is reflected in the higher capital expenditure by the government over the last five years, according to a Morgan Stanley report.
The report highlights that the improving fiscal dynamics bode well for the growth mix and inflation management of the Indian economy.
The faster pace of consolidation in revenue deficit is reflective of an improved spending mix, not only by the Centre but also by the states. Indeed, a key change post-pandemic has been the shift towards higher capex by the centre, with Central government capex doubling to 3.2 per cent of GDP in FY2025 from 1.6 per cent of GDP in FY2020 (pre-pandemic), the report further states.
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Similarly, states' capex is tracking at 2.3 per cent of GDP in F2025 from 1.9 per cent of GDP pre-pandemic.
"Going forward, we expect the Central government fiscal deficit to consolidate further, albeit at a slower pace to 4.4 per cent of GDP in FY2026, while for the states, we expect the deficit to narrow to 2.6 per cent of GDP," the report states.
The report highlights that prudent fiscal dynamics with a combination of consolidating deficit and improving mix of spending bode well for the growth mix and thus inflation. Further, a flexible inflation targeting framework has also been instrumental in reducing inflation volatility. Indeed, CPI inflation has averaged at 4.9 per cent since 2016, compared to 7.7 per cent in the previous four years. As such, this has positive implications for the cost of capital, especially over the medium term.
The report also highlights the rising tax buoyancy in the Indian economy. The Centre's gross tax revenue stood at 11.5 per cent of GDP in F2025, up from 9.9 per cent of GDP in FY2020. It has remained range-bound between 11.3-11.7 per cent of GDP in the last four years.
The improved strength in tax revenues is pivotal in facilitating the consolidation of the fiscal deficit. Indeed, the tax buoyancy has averaged at 1.2 since the pandemic and is tracking at 0.98 in F2025, from a pre-pandemic average of 0.9. The budget estimates an upturn in gross tax revenues to 12 per cent of GDP in F2026, the report points out.
According to the report, the non-tax revenues are buoyed by robust dividend payouts from the RBI and other PSUs, the share of which tripled to 0.9 per cent of GDP in FY2025, from 0.3 per cent of GDP in FY2021.
Indeed, dividends from the RBI have been rising in the last few years, averaging 0.4 per cent of GDP since the pandemic and rose to a record high of INR 2.7 lakh crore (0.7 per cent of GDP) in FY2026. Moreover, the PSU dividend received by the government in FY2025 totalled to INR 74,000 crore, up 16 per cent year-on-year, with the highest contributions coming from Coal India, followed by ONGC.