Stringent adherence to fiscal consolidation targets has been one clear area of focus for the NDA regime in its successive Budgets, which have otherwise tried to juggle one-too-many objectives. In the latest one, the fiscal deficit has been contained at 4.8 per cent for FY25 despite nominal GDP growth undershooting estimates at 9.7 per cent (10.5 per cent assumed). The deficit target for FY26 has been pegged at an even tighter 4.4 per cent despite the ₹1 lakh crore giveaway to personal taxpayers. The Statement of Fiscal Policy accompanying Budget documents suggests that the Centre will continue to be tightfisted. It has laid down the ambition of trimming the Centre’s debt-to-GDP ratio from the current 57.1 per cent to about 50 per cent by 2031.

Critics have questioned the need for such frugality when economic activity is sluggish. However, fiscal consolidation is absolutely necessary for India’s financial stability and the health of its bond markets. Much of India’s economic rebound post-Covid has been driven by the government ratcheting up its capital expenditure. But government-driven capex is now beginning to undershoot targets, making it the right time for the private sector to pick up the slack on fixed capital formation. A conservative borrowing calendar allows the Centre to get out of the way of private enterprises looking to raise capital from the bond markets or banks looking to use their funds to bankroll credit. It is thanks to strict adherence to deficit targets that the government has managed to trim its market borrowings in absolute terms, from ₹11.77 lakh crore in FY24 to ₹11.62 lakh crore in FY25, with a target of ₹11.53 lakh crore in FY26. Lower borrowings also have the effect of moderating government security yields which set the floor for interest rates in the market. Fiscal frugality may just have smoothened the path for the Monetary Policy Committee to consider easing rates in its upcoming meets.

This apart, the Centre has announced the constitution of the 8th Pay Commission recently, which can be expected to significantly bloat government revenue expenditure. The 7th Pay Commission, whose term ends in December, has contributed to a 24 per cent increase in the wage bill. As the impact of the 8th Pay panel may begin to bite from FY27, the Centre is perhaps creating headroom without upsetting fiscal math.

Finally, government actions on running up large deficits are no longer watched only by domestic institutions and investors. With the opening up of domestic bond markets to foreign investors and the inclusion of Indian gilts in global benchmarks, Foreign Portfolio Investors (FPI) now have a much bigger say in domestic bond movements. Signs of fiscal profligacy can prompt FPIs to vote with their feet, which can spike up yields and destabilise the Rupee. The Centre must have been aware of this risk in the current global milieu, where Trump’s whimsical ways have resulted in heightened volatility in FPI flows.

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