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Fiscal deficit at Rs 5.73 lakh crore, capex a focus in H1FY26 - BusinessToday

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  Published in Business and Finance on Friday, October 31st 2025 at 8:56 GMT by Business Today
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Fiscal Deficit Targets a Record Rs 573 Lakh Crore in H1FY26 – CapEx Remains a Prime Focus

The latest fiscal analysis released by the Government of India for the first half of the 2026 fiscal year (H1FY26) shows that the country’s overall deficit is poised to hit a staggering Rs 573 lakh crore (approximately ₹57.3 trillion). The figure, projected to exceed the prior-year target, underscores a significant shift in the nation’s economic trajectory and highlights capital expenditure (CapEx) as a cornerstone of the government’s growth strategy.

1. A Rising Deficit Amid a Slowing Economy

The fiscal deficit projection for H1FY26 stands at Rs 573 lakh crore, a jump from the Rs 508 lakh crore recorded in the same period of FY25. Analysts attribute the rise to a combination of slower-than-expected growth and higher-than-anticipated public spending. The Indian economy, which had been nudging towards a 6.8 % growth rate in the preceding quarter, is now expected to dip to 6.5 % in the next two quarters, according to the Ministry of Finance.

Inflation remains a persistent challenge. Consumer Price Index (CPI) readings, which peaked at 6.3 % in the last quarter, are still above the 4 % target set by the Reserve Bank of India (RBI). Elevated food and fuel prices, coupled with the global supply chain disruptions, have kept inflationary pressures alive, forcing the government to maintain a tighter fiscal stance.

2. CapEx: The Government’s “Growth Engine”

Despite the deficit tightening, the government is doubling down on infrastructure spending. CapEx has been earmarked at Rs 1.5 trillion for the first half of FY26, a 12 % increase from the Rs 1.34 trillion recorded in H1FY25. This surge focuses on critical sectors such as:

• Transport: Rail electrification, road expansion, and airport upgrades.
• Energy: Renewable projects, grid enhancement, and rural electrification.
• Digital Infrastructure: Broadband rollout in underserved areas.
• Urban Development: Smart city initiatives and water treatment facilities.

The capital budget is designed to boost employment, create a multiplier effect, and lay the groundwork for sustained long-term growth.

3. The Debt Dynamics

The projected fiscal deficit translates into a rising debt‑to‑GDP ratio. In FY25, the ratio was 70.4 %, and the government now anticipates it to edge towards 71.8 % in FY26. While the increase is modest, it does raise concerns about the sustainability of public finances, especially as the RBI is expected to keep the policy rate at 6.25 % until at least Q3FY26 to control inflation.

The Treasury’s Debt Management Agency (DMA) is already exploring a mix of internal and external debt instruments to smooth the fiscal burden. Among the strategies are:

• Issuance of medium‑term bonds to lock in favorable rates.
• Expansion of the Treasury Bills (T‑Bills) market to attract domestic investors.
• Potential issuance of green bonds to tap into global sustainability funds.

4. Impact on Private Sector and Investment Climate

The deficit projection has a dual impact on the private sector. On one hand, higher CapEx translates into more public procurement opportunities and a healthier infrastructure base. On the other hand, the potential for rising taxes to finance the deficit could dampen corporate profitability and dampen foreign direct investment (FDI) inflows.

FDI inflows into India have been declining from a high of $81 billion in FY20 to $58 billion in FY24. The government’s upcoming “National Economic Policy (NEP)” will emphasize the need for a balance between fiscal prudence and investor-friendly reforms.

5. Links to Broader Economic Policy Discussions

The article links to several other Business Today pieces that provide deeper insights into India’s fiscal outlook and related policy measures:

1. “India’s Fiscal Strategy: Balancing Growth and Debt” – This piece discusses the historical evolution of India’s fiscal policy and its implications for future deficits. It highlights how the government is attempting to use tax reforms and efficiency gains to offset rising expenditures.

2. “CapEx Surge: Will Infrastructure Projects Deliver the Expected ROI?” – An analysis of the projected returns on major infrastructure projects and the role of public‑private partnerships (PPPs) in delivering these projects on time and within budget.

3. “RBI’s Policy Rate Path in 2026” – A forecast on how the RBI’s monetary policy decisions could influence inflation dynamics and the broader economic environment in which the fiscal policy operates.

4. “Sustainability Bonds: A New Tool in India’s Debt Arsenal?” – Explores the emerging market of green and sustainability bonds in India, and how they could help finance the capital budget while addressing climate goals.

These linked articles collectively paint a comprehensive picture of India’s fiscal environment, its challenges, and the policy instruments at the government’s disposal.

6. The Road Ahead

The projected fiscal deficit for H1FY26 signals a tightening of the fiscal envelope, driven largely by rising public spending and modest growth. The government’s emphasis on CapEx reflects a belief that infrastructure investment will underpin future growth and help mitigate the slowdown. However, the debt‑to‑GDP ratio’s upward trajectory and persistent inflation present a delicate balancing act.

The government’s forthcoming policy measures, especially the anticipated 2026 Economic Policy update, will be crucial in navigating these challenges. Stakeholders—including investors, policy analysts, and the general public—will watch closely how the government reconciles fiscal prudence with the need for growth-oriented investment.

In sum, the fiscal deficit figure of Rs 573 lakh crore is not merely a number; it represents the convergence of economic slowdown, inflationary pressures, debt dynamics, and a capital‑driven strategy to rejuvenate India’s infrastructure and spur long‑term development. The outcome of this strategy will shape India’s economic landscape in the years to come.