India’s Fiscal Tightrope: Can the Government Spend Its Way to Growth Without Falling into Debt?
- Rayyan H. Hazarika
- Aug 26
- 4 min read
India's borrowing and spending strategies, as well as how they relate to continuing geopolitical crises, have been put to the test by the economic consequences from COVID-19. What is on the table is India's fiscal deficit, which denotes the shortfall in income relative to expenditure. In short, a fiscal deficit means a government borrows money to fund its overspending.
Both the spending and the earning sides of India’s government need to be managed appropriately for the government to effectively control inflation, growth, public welfare, and investor confidence. Therefore, can India continue to go on a spending spree while keeping its economic growth in check without letting the debt spiral out of control?
Spending on Quid Marks and “Reserve Not Treasuries”
In her 2025 Union Budget, Smt Sitharaman publicly stated India was on track for a fiscal deficit of 5.9 percent of GDP for 2025, aiming to reduce it to below 4.5 percent by 2026. While spending must be enough to support the economy, it must also keep borrowing to a minimum.[1]
By September 2025, the total deficit was already set at 4.4 percent of the GDP. — About 29.4 % of the total budget for the year set by the Government has already been utilized. [2]With several months remaining in the financial year, it is impressive that this figure is nearing the halfway mark.
India’s public debt exceeds 60% of its GDP, excessive public debt places stress on interest rates, which private investment heavily relies on. Therefore, a result of government borrowing tends to leave little wiggle room for a business to expand and grow.[3] Borrowing too much money increases the cost of acquiring it for everyone else, so government debt needs to be balanced.
Allocation of Government Spending
India invests considerably in rural employment and infrastructure development. The role these programs play in reducing rural distress during crises is indeed noteworthy but is offset by issues of replacement and low employment. So are payment delays, and multiple independent audits, such as the 2024 one done by CAG, confirm these problems.[4]
Simultaneously, important sectors such as health care and education are allocated funds. In a report from 2024, the World Bank states that India allocates less than 3% of its GDP on education, and healthcare is barely above 2.1% [5]— both figures are significantly below the global standard. Spending in these areas could greatly enhance productivity, skill acquisition, and growth potential in the long term.
A Local Challenge in A Globalised Economy
No country operates in a vacuum. Various global phenomena, such as an increase in crude oil prices, interest rate hikes by the US Federal Reserve, and unrest in Ukraine and Gaza, shape and determine everything from a country’s import expenses and foreign direct investment perception to their international standing.
An increase in global oil prices not only raises India's import bill but also escalates the burden of fuel subsidies, thereby straining government finances. Strain on the fiscal deficit puts undue pressure on the government.
As highlighted in the 2025 Economic Overview of India, if fuel prices rise by 10% and there are no changes made in subsidies, the fiscal deficit grows by 0.1%. [6]This exemplifies how susceptible public finances can become if there is exposure to global unpredictability.
The Parcel of Tax Collection
Enhancing revenue generation remains a persistent challenge. India's tax-to-GDP ratio, standing just above 11%, is significantly lower compared to other emerging economies such as Brazil and South Africa, where the ratio is around 25% [7]. Although Goods and Services Tax (GST) collections have shown improvement, reaching ₹1.7 lakh crore in March 2025, they are insufficient to bridge the fiscal gap.
Experts suggest that the government should focus on broadening the tax base, enforcing compliance, and rationalising tax exemptions that benefit only a few.
How to Fix It: The Policy Recommendations
To bring down the fiscal deficit without derailing growth, economists are suggesting a twin-pronged approach:
Smarter Spending – Investment in infrastructure sectors such as transportation, energy, and digital connectivity is essential. According to the Deloitte India Economic Outlook (2025), such investments have a high multiplier effect, stimulating economic activity and employment generation.[8]
Better Revenue Management – Strengthening tax administration, minimizing tax evasion, and expanding the tax net are critical steps. Additionally, promoting non-tax revenue sources through strategic disinvestment of public sector enterprises can provide a supplementary boost to government finances.
Looking Ahead
The government has a limited window to correct course. With large elections behind us and political capital available, the moment is now to make decisions that endure. India's economic stability in the coming decade could well depend on what policies are put in place in the coming year.
India must implement measures to increase domestic revenue mobilization in the future by broadening the tax base and preventing tax evasion with the use of reliable digital tracking systems. Simultaneously, expenditures must be channelled towards high-yield areas such as infrastructure, education, healthcare, and green energy projects, which have the potential to generate sustained economic returns. The government must also prioritize reforms aimed at improving the efficiency of public sector enterprises and actively pursue strategic disinvestment to reduce fiscal pressures.
Furthermore, adopting counter-cyclical fiscal policies that build fiscal buffers during boom periods will enable the government to better manage downturns. By focusing on these long-term structural solutions, India can strengthen its economic resilience and lay a solid foundation for inclusive and sustainable growth.
Conclusion
India's fiscal deficit is not a number — it's a reflection of priorities, discipline, and strategy. It can support a high-growth economy if managed well. It can ensnare the country in debt and render finances otherwise volatile. As articulated in the 2025 RBI Financial Stability Report, "A sustainable fiscal path is a prerequisite for long-term macroeconomic stability." The decisions made today will significantly influence India's economic trajectory, shaping its development prospects for generations to come.
[1] (India Budget | Ministry of Finance | Government of India, n.d.)
[2] (“Union Budget 2025,” 2025)
[3] (Reserve Bank of India - Press Releases, n.d.)
[4] (Audit Reports | Comptroller and Auditor General of India, n.d.)
[5] (World Bank Open Data, n.d.)
[7] (Economic Survey, n.d.)
[8] (Deloitte | Audit, Consulting, Financial, Risk Management, Tax Services, n.d.)
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