DECOMPOSITION OF INDIA’S FISCAL DEFICIT: AN EMPIRICAL STUDY OF THE UNION GOVERNMENT’S FISCAL POSITION AND CONSOLIDATION PATH

India’s fiscal deficit has remained a central concern of macroeconomic policy, particularly in the context of rising public expenditure, debt-servicing obligations and the need to sustain economic growth through public investment. The present study examines the evolution, composition and consolidation of the Union Government’s fiscal deficit in India, with particular emphasis on the period covering the pre-pandemic, pandemic and postpandemic phases. The study decomposes the fiscal deficit into revenue deficit, capital expenditure and non-debt capital receipts and evaluates changes in the quality of government expenditure and the sustainability of the fiscal consolidation process. The analysis is based primarily on secondary data obtained from Union Budget documents, Economic Surveys and the accounts of the Controller General of Accounts. The findings indicate a substantial improvement in India’s fiscal position after the pandemic-induced deterioration. The fiscal deficit declined from 9.2 per cent of GDP in FY2020–21 to 4.8 per cent in FY2024–25 and 4.4 per cent in FY2025–26. The revenue deficit has also declined substantially, while the government has increasingly prioritised capital expenditure. The Economic Survey 2025–26 reports that effective capital expenditure rose to about 4.3 per cent of GDP in FY2025–26, compared with 2.7 per cent in the pre-COVID period. The study concludes that India’s recent fiscal consolidation has been characterised not merely by reduction in the headline deficit but also by a gradual improvement in expenditure composition. However, high interest payments, persistent revenue expenditure requirements and the need to maintain growth-enhancing public investment remain important challenges. A credible medium-term debt reduction strategy, improved revenue mobilisation and expenditure efficiency are therefore essential for durable fiscal sustainability.