India Begins 2025 with Focus on Fiscal Consolidation

As India entered 2025, the Union Government reaffirmed its commitment to fiscal consolidation while maintaining growth momentum through sustained public investment. This approach reflects the government’s effort to balance macroeconomic stability with developmental priorities amid global economic uncertainties.

Fiscal consolidation refers to measures aimed at reducing the fiscal deficit and public debt over time. For FY 2025–26, the government has reiterated its medium-term target of lowering the fiscal deficit by rationalising expenditure, improving tax compliance, and enhancing non-tax revenues, while avoiding abrupt expenditure cuts that could hamper growth. A stable fiscal framework is essential for controlling inflation, maintaining sovereign credit ratings, and strengthening investor confidence.

At the same time, the government has emphasised the continuation of high capital expenditure, particularly in infrastructure, defence manufacturing, railways, roads, and digital public infrastructure. Capital expenditure is widely recognised for its high multiplier effect, as it stimulates private investment, creates employment, and enhances long-term productive capacity. In recent years, public capex has acted as a counter-cyclical tool, supporting growth when private investment remained cautious.

However, achieving fiscal consolidation while sustaining welfare expenditure remains a significant policy challenge. India’s social spending commitments—such as food security, health, education, and rural employment—are critical for inclusive growth and social stability. Rising interest payments and subsidy pressures further constrain fiscal space, limiting the government’s ability to reduce the deficit rapidly.

The way forward lies in improving the quality of expenditure rather than merely reducing spending. Measures such as targeted subsidies through Direct Benefit Transfer (DBT), disinvestment and asset monetisation, widening the tax base, and boosting state-level fiscal discipline can support consolidation efforts. Additionally, fostering private sector participation through public–private partnerships (PPPs) can reduce the burden on public finances.

Overall, India’s fiscal strategy in 2025 reflects a calibrated approach—prioritising growth-enhancing investments while gradually restoring fiscal prudence—crucial for sustaining high growth in the medium to long term.