India’s recent fiscal performance reflects a careful balancing of growth imperatives and fiscal prudence, the 2025-2026 survey noted.
Strong macroeconomic fundamentals have been reinforced by a calibrated fiscal strategy that prioritised capital expenditure while steadily consolidating deficits and debt, it said.
State governments have also made progress in recent years, particularly in scaling up capital expenditure and strengthening their own revenue mobilization, the survey said.
However, emerging trends in State-level debt and deficits underscore the need for continued calibration, it said.
At the same time, the increasing reliance by some States on unconditional cash transfer programmes has altered expenditure composition, raising concerns about expenditure rigidity and medium-term fiscal flexibility, the survey said.
“While such transfers serve important distributional objectives, their scale and design need to be balanced against the imperative of preserving space for growth-enhancing investments. Improved targeting, periodic review, and outcome-oriented design can help mitigate fiscal rigidities,” it said.
From a macro perspective, any fiscal indiscipline at the State level also casts a shadow on the sovereign borrowing costs, the survey warned.
With markets pricing government debt on a consolidated basis, persistent revenue deficits or an expansion of committed expenditures at the State level could affect sovereign bond yields, it said.
“This underscores the importance of coordinated fiscal discipline across levels of government, where fiscal policy is oriented toward expanding productive capacity and income growth rather than creating permanent expenditure commitments. Strengthening the fiscal capacity of local bodies, in line with constitutional intent, can also help improve expenditure efficiency and investment outcomes at the grassroots level,” the survey said.
Ongoing reforms in taxation, including GST 2.0 and personal income tax, are expected to enhance the efficiency of the tax system by simplifying structures, reducing compliance costs, and broadening the tax base, with implications for both economic activity and revenue mobilization, it said.
In parallel, wider use of digital systems in tax administration and public financial management is likely to strengthen compliance, improve expenditure disbursements, and enhance fiscal transparency. Together, these measures will enable progress along the medium-term debt path, thereby strengthening macroeconomic stability, the survey said.
