IMF Forecasts India's Fiscal Deficit Improvement in FY26 Driven by Spending Cuts, Concerns Rise Over Underinvestment

The International Monetary Fund's (IMF) Fiscal Monitor for October 2025 forecasts a notable improvement in India's general government overall balance (fiscal deficit) from -7.9 percent of GDP in FY25 to -7.1 percent in FY26. This reduction is primarily achieved by a contraction in government expenditure, projected to fall from 28.4 percent of GDP in FY25 to 27.3 percent in FY26, with this ratio expected to remain stable until 2030. This path of fiscal consolidation is made more challenging by a predicted decline in government revenue from 20.5 percent to 20.2 percent of GDP in FY26, possibly due to tax cuts.

India's government spending as a share of GDP (28.4%) is considerably higher than regional neighbours like Indonesia (16.5%), Malaysia (23.4%), Thailand (22.7%), and Vietnam (21.7%). While India's revenue collection is often higher than some peers, its fiscal deficit remains significantly wider, indicating that high spending is the core issue.

Impact This news has a significant impact on the Indian economy. The reliance on expenditure cuts suggests a path of austerity that could stifle growth by reducing investment in critical areas such as infrastructure, health, and education. This may compromise India's future productive capacity and human capital. The persistent high deficits forecast until 2030 signal ongoing pressure on public debt, potentially crowding out private investment and limiting the government's ability to respond to economic shocks. A strategic fiscal overhaul focusing on boosting revenue and improving spending efficiency is urgently needed for durable economic growth. This forecast is rated 7/10 for its potential economic impact.

Difficult Terms: Fiscal Deficit: The difference between the government's total expenditure and its total revenue (excluding borrowings). It indicates how much the government needs to borrow to meet its expenses. GDP (Gross Domestic Product): The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. General Government Overall Balance: This includes the fiscal deficit of both the central government and the state governments, providing a comprehensive view of the government sector's financial position. Fiscal Consolidation: Measures taken by a government to reduce its budget deficit and public debt, often through spending cuts or tax increases. Austerity: A set of policies undertaken during times of severe economic difficulty to reduce government budget deficits through spending cuts, tax increases, or a combination of both.