​Unenviable choice: On the government’s fiscal policy space

The Goods and Services Tax (GST) revenue of ₹1.74 lakh crore in December 2025 confirms just how narrow the government’s fiscal policy space is. The December data reflect the economic activity in November, the second month under the new, reduced GST rates. December’s revenues were marginally higher than the ₹1.7 lakh crore collected in November. This was expected. Any belief that the rate reductions would lead to an immediate and sustained increase in demand, and hence GST collections, was pure optimism. In reality, people are more likely to use that extra money to pad up savings or pare down debt, with increased consumption a more medium-term outcome. This happened following the income-tax rejig in Budget 2025 too, when the government effectively exempted people earning up to ₹12 lakh a year from income-tax. The GST and income-tax decisions were both welcome relaxations. However, at least for this year, they are going to cause the government more pain than gain. The most recent data on the government’s accounts reflect this. Total tax revenue stood at ₹13.9 lakh crore at the end of November 2025, 3.4% lower than in the same period of 2024-25. On the other hand, the Centre’s capital expenditure stood at ₹6.58 lakh crore in the April-November 2025 period, 28% higher than in the same period of the previous year. This jump in capital expenditure was balanced out by a much slower growth in revenue expenditure of 2.1%. However, of the two types of spending, the government has much less discretion over revenue expenditure, which comprises expenses such as salaries, pensions and interest on loans. These cannot be kept subdued for long.

The government has valiantly tried to bolster its earnings through the new excise and GST rates on tobacco products, not to mention the health and security cess on the manufacture of pan masala. However, since all these new rates and cesses will come into effect only on February 1, their full benefit will be felt only in the next financial year. Yet, the troubles for the government’s finances do not end there. The remarkably low levels of wholesale inflation this year — averaging -0.08% so far — have also meant that the size of the nominal GDP would likely be smaller than initially budgeted. This means that several ratios pegged to it, most pertinently the fiscal deficit and debt-GDP, would automatically come in larger than earlier estimated. The Centre has displayed commendable fiscal discipline over the last few years. However, this year, it has placed before itself the unenviable choice of either pulling back on growth-generating capital expenditure, or risking missing its fiscal targets.