The Economic Survey 2025-26 emphasises the need for fiscal flexibility for the Centre rather than strict adherence to the 3% fiscal deficit target set under the Fiscal Responsibility and Budget Management (FRBM) Act. While the Centre has demonstrated disciplined fiscal management by reducing its deficit from 9.2% of GDP in 2020-21 to an estimated 4.4% in 2025-26, the Survey argues that rigid targets may limit the government’s ability to respond to unpredictable global shocks.

Fiscal flexibility is important because it allows the government to adjust policies to maintain macroeconomic stability, respond to emerging expenditure needs, and continue strategic investments in infrastructure and social sectors. Example: During periods of global economic volatility, such as commodity price shocks or trade disruptions, flexibility allows the Centre to increase targeted spending without jeopardising medium-term growth.

Thus, the Survey supports a pragmatic approach, balancing fiscal prudence with the need to retain the ability to act decisively in a volatile geopolitical and geoeconomic environment.

The Survey identifies several reasons why a rigid 3% fiscal deficit target may not be suitable at present. First, the target has historically been difficult to achieve—since 2003, it has been met only once—which eroded fiscal credibility. Enforcing it strictly in a volatile global environment could force the government to curtail capital expenditure or developmental spending unnecessarily.

Second, global economic uncertainty, including geopolitical tensions and trade disruptions, makes a flexible approach more appropriate. Rigid deficit targets could constrain the government’s ability to implement counter-cyclical fiscal measures during crises, affecting growth and employment.

Finally, the current fiscal framework, which aims to reduce the debt-to-GDP ratio to 50% by 2031 with a 1% leeway, provides a measurable and credible path while retaining the flexibility to adjust fiscal policy in response to emerging needs. This approach safeguards medium-term fiscal sustainability and investor confidence.

The Survey praises the Centre for disciplined fiscal management following the COVID-19 pandemic. After the fiscal deficit spiked to 9.2% of GDP in 2020-21, the government has steadily reduced it to an estimated 4.4% in 2025-26, achieving the Finance Minister’s commitment to halve the FY21 deficit within five years.

Moreover, the quality of fiscal expenditure improved alongside deficit reduction. Capital expenditure received emphasis alongside revenue expenditure, supporting infrastructure, digital connectivity, and social sector initiatives. This ensures that fiscal consolidation does not compromise growth potential.

Example: The simultaneous management of pandemic-related relief measures and strategic capital projects reflects disciplined fiscal planning. This sustained commitment restored trust among financial markets and credit-rating agencies, enhancing India’s macroeconomic credibility and investment attractiveness.

State finances have worsened due to a combination of slower revenue growth and higher expenditure obligations. Between 2018-19 and 2024-25, 18 States saw revenue balance deterioration, with 10 moving from surplus to deficit. Key drivers include lagging tax and non-tax revenue growth relative to nominal GDP and increasing spending commitments such as discretionary unconditional cash transfers.

Revenue expenditure continues to dominate State budgets, leaving limited fiscal space for capital investment. As a result, long-term investments in infrastructure, education, and health may be compromised, affecting medium-term growth.

Example: States implementing large-scale cash transfer programmes, such as Kerala and Assam, experienced rising revenue deficits. This illustrates the trade-off between short-term welfare interventions and sustainable fiscal health, highlighting the need for careful expenditure prioritisation and enhanced revenue mobilisation.

Example 1: Pandemic response – In 2020-21, adhering strictly to the 3% fiscal deficit target would have constrained the government from implementing emergency health spending and relief measures. Flexibility allowed the Centre to increase expenditure without destabilising the economy.

Example 2: Capital vs revenue expenditure – A rigid deficit limit could have forced cuts in capital projects such as roads, digital infrastructure, and urban development. The current framework, which targets a debt-to-GDP ratio of 50% by 2031 with a 1% leeway, allows capital expenditure to continue alongside fiscal consolidation.

These examples demonstrate that policy flexibility enables a balance between fiscal prudence and developmental priorities, supporting growth while maintaining macroeconomic stability.

Delaying strict FRBM targets has nuanced implications. For the Centre, flexibility allows adaptive fiscal policy in response to global volatility, supporting strategic investments, infrastructure development, and employment generation. This adaptive approach can stabilise the economy and maintain investor confidence.

For States, however, the situation is more complex. While the Centre exercises prudence, several States face rising revenue deficits due to lagging revenues and increased expenditures such as cash transfers. Without reforms in revenue mobilisation or expenditure management, delaying strict targets at the Centre may not relieve fiscal stress at the State level.

Therefore, flexibility at the Centre should be complemented with prudent State-level fiscal management, targeted grants, and expenditure rationalisation. This ensures that both levels of government maintain fiscal sustainability while balancing growth and welfare objectives.

The Survey advocates a phased and flexible fiscal framework. The current strategy aims to reduce the Centre’s debt-to-GDP ratio to 50% by 2031, with a 1% leeway. This provides a concrete, measurable goal while retaining flexibility to adjust fiscal policy to emerging needs.

Key elements include:

• Time-bound objectives: Clearly defined targets enhance credibility.
• Leeway for adjustments: Margins above or below targets allow counter-cyclical fiscal responses during economic shocks.
• Complementary measures: Prioritising capital expenditure, improving revenue mobilisation, and transparent reporting maintain fiscal discipline while supporting developmental goals.