Economic Survey 2025-26 Chapter 2 Summary for UPSC
Chapter 2 of the Economic Survey 2025-26, titled Fiscal Developments: Anchoring Stability Through Credible Consolidation, explains how India’s fiscal policy has supported macroeconomic stability while continuing growth-enhancing public investment.
The chapter’s core argument is that India’s fiscal consolidation has not been achieved by cutting productive spending. Instead, the Centre has reduced deficits, strengthened revenue mobilisation, rationalised revenue expenditure and increased capital expenditure. This has improved fiscal credibility and contributed to sovereign rating upgrades.
Chapter Snapshot: Most Important Fiscal Facts
The chapter’s main UPSC theme is growth-friendly fiscal consolidation: India is reducing deficits and debt while protecting capital expenditure and improving expenditure quality.
Central Government Finances: Fiscal Policy as a Stability Anchor
The chapter begins by noting that India received three sovereign credit rating upgrades in 2025 from Morningstar DBRS, S&P Global Ratings and Rating and Investment Information, Inc. These upgrades recognised prudent fiscal management, deficit reduction, improved revenue buoyancy and a shift towards capital investment.
The Union Budget for FY22 had announced a medium-term glide path to bring the fiscal deficit below 4.5% of GDP by FY26. Instead of rigid annual targets, this approach retained flexibility so that growth-enhancing expenditure, especially capital expenditure, would not be compromised.
Fiscal deficit shows total borrowing requirement. Revenue deficit shows borrowing used for current expenditure. Primary deficit equals fiscal deficit minus interest payments. Lower primary deficit means fresh borrowing is increasingly linked to past interest obligations rather than current spending.
Sustained Revenue Buoyancy Supports Consolidation
Revenue receipts of the Centre increased from an average of about 8.5% of GDP during FY16–FY20 to around 9.1% of GDP during FY22–FY25 PA. This was mainly due to higher gross tax revenue, which rose from 10.8% of GDP to about 11.5% of GDP.
Direct Tax Base Expansion
The share of direct taxes in total major taxes increased from 51.9% in the pre-pandemic period to 55.5% in post-pandemic years, reaching 58.8% in FY25 PA. Non-corporate tax collections improved strongly due to better compliance, formalisation and rising incomes.
| Direct Tax Component | FY22 | FY23 | FY24 | FY25 RE | FY26 BE |
|---|---|---|---|---|---|
| Gross Tax Revenue | 27.09 | 30.54 | 34.66 | 38.53 | 42.70 |
| Corporate Tax | 7.12 | 8.26 | 9.11 | 9.80 | 10.82 |
| Non-Corporate Tax | 6.96 | 8.34 | 10.45 | 12.57 | 14.38 |
| Personal Income Tax | 6.69 | 8.04 | 10.07 | 11.99 | 13.57 |
| Securities Transaction Tax | 0.23 | 0.25 | 0.34 | 0.55 | 0.78 |
| Nominal GDP | 235.97 | 268.90 | 301.23 | 330.68 | 357.14 |
NUDGE Framework in Tax Compliance
The Income Tax Department’s NUDGE approach — Non-intrusive Usage of Data to Guide and Enable — uses behavioural economics, data analytics and gentle prompts to improve voluntary compliance without coercive enforcement.
Nearly 25,000 taxpayers revised returns; foreign assets worth over ₹29,000 crore and foreign income exceeding ₹1,000 crore were declared.
Over 91,000 taxpayers filed updated returns; excessive deductions reduced by nearly ₹2,050 crore and additional tax payments exceeded ₹680 crore.
Targeted nudges reduced incorrect House Rent Allowance claims and generated additional tax collections of over ₹119 crore.
More than 8,500 deductors revised TDS returns, adding over 1.08 crore deductees and nearly ₹4,825 crore additional TDS.
Non-Tax Revenues
Non-tax revenues remained stable at around 1.4% of GDP in the post-pandemic period. The rise was supported by dividends and profits, especially surplus transfers from RBI and improved performance of public sector banks and financial institutions.
| Non-Tax Revenue Component | FY22 | FY23 | FY24 | FY25 PA | FY26 BE |
|---|---|---|---|---|---|
| Interest Receipt | 0.22 | 0.28 | 0.38 | 0.41 | 0.48 |
| Dividends and Profits | 1.61 | 1.00 | 1.71 | 3.08 | 3.25 |
| Others | 1.81 | 1.55 | 1.92 | 1.87 | 2.09 |
| Total | 3.65 | 2.85 | 4.02 | 5.38 | 5.83 |
GST: Revenue Stability Amid Reform
GST has strengthened government revenues, deepened formalisation and signalled reform intent. Gross GST revenue during April–December 2025 stood at ₹17.4 lakh crore, registering 6.7% YoY growth. Even though percentage growth moderated due to lower inflation and nominal GDP conditions, collections recorded multiple all-time highs in absolute terms.
GST 2.0: Key Reform Structure
The 56th GST Council meeting introduced a simplified rate structure: a standard rate of 18%, a merit rate of 5%, and a special demerit or sin-goods rate of 40% for select goods and services. The reform came into effect from 22 September 2025.
| Sector | Major GST 2.0 Change | Expected Impact |
|---|---|---|
| Agriculture | GST on tractors and agri machinery lowered to 5%; key fertiliser inputs reduced from 18% to 5%. | Lower input cost and support to rural economy. |
| Auto and Auto Parts | Small cars, motorcycles up to 350cc, three-wheelers, buses, trucks and ambulances reduced to 18%. | Boost to auto demand and manufacturing. |
| Electronics | ACs, large TVs, dishwashers, monitors and projectors reduced from 28% to 18%. | Improved affordability and consumption. |
| Textiles and Labour-Intensive Goods | Man-made fibres reduced from 18% to 5%; man-made yarn from 12% to 5%. | Relief to MSMEs and labour-intensive sectors. |
| Essentials and Food | Several daily-use goods moved to 5%; UHT milk, Indian breads and packaged paneer moved to zero GST. | Lower cost of living and consumption support. |
| Medicines and Equipment | Zero GST on select life-saving drugs; most drugs and medical devices reduced to 5%. | Better healthcare affordability. |
| Hotel and Personal Services | Hotel accommodation up to ₹7,500 per unit per day reduced to 5%; gyms, salons and yoga centres reduced to 5%. | Support to tourism and personal services. |
| Insurance | GST exemption for individual life and health insurance policies. | Insurance affordability improves. |
The Survey suggests reimagining the e-Way Bill system as a logistics facilitator through trusted dealer frameworks, e-seals, vehicle tracking and risk-based system-generated alerts, reducing discretionary checks and compliance friction.
Trends in Expenditure: Better Quality of Spending
A major strength of India’s fiscal consolidation has been improvement in expenditure quality. Revenue expenditure moderated from 13.6% of GDP in FY22 to 10.9% in FY25, creating space for productive capital expenditure.
Revenue Expenditure and Subsidy Rationalisation
Major subsidies declined from 1.9% of GDP in FY22 to 1.2% in FY25 and are budgeted at 1.1% of GDP in FY26. This happened while continuing food security support, with about 78.9 crore beneficiaries receiving free food grains as of October 2025.
| Revenue Expenditure Component | FY22 | FY23 | FY24 | FY25 PA | FY26 BE |
|---|---|---|---|---|---|
| Pay & Allowances | 2.49 | 2.69 | 2.92 | 3.31 | 3.52 |
| Pension | 1.99 | 2.42 | 2.38 | 2.74 | 2.77 |
| Major Subsidies | 4.46 | 5.31 | 4.12 | 3.88 | 3.83 |
| Interest Payments | 8.05 | 9.29 | 10.64 | 11.16 | 12.76 |
| Defence Services | 2.29 | 2.56 | 2.90 | 2.91 | 4.92 |
| Total | 32.01 | 34.53 | 34.94 | 36.04 | 39.44 |
DBT and Public Financial Management
Direct Benefit Transfers reduced leakages, with estimated savings of ₹3.48 lakh crore over the past decade.
Beneficiary coverage expanded nearly sixteen-fold from about 11 crore to 176 crore over the past decade.
Just-in-Time fund release replaced bulk credit-push transfers with expenditure-based debit-pull releases.
Route optimisation in PDS used IIT Delhi and UN World Food Programme algorithms to reduce costs and emissions.
Capital Expenditure
Capital expenditure was scaled up from an average of 1.7% of GDP in the pre-pandemic period to an average of 2.9% of GDP post-pandemic. Effective capex rose from 2.7% of GDP to 3.9% of GDP over the same period and reached 4% in FY25 PA.
| Capital Expenditure Sector | FY24 ₹ lakh crore | FY25 PA ₹ lakh crore | YoY Growth | UPSC Meaning |
|---|---|---|---|---|
| Road Transport and Highways | 2.64 | 2.85 | 8.1% | Core infrastructure push. |
| Railways | 2.43 | 2.52 | 3.9% | Transport capacity and logistics. |
| Defence | 1.65 | 1.71 | 3.7% | Strategic capacity. |
| Transfer to States | 1.23 | 1.66 | 34.9% | Supports State capex. |
| Telecommunications | 0.59 | 0.74 | 24.4% | Digital infrastructure. |
| Housing and Urban Affairs | 0.26 | 0.32 | 19.6% | Urban growth and housing. |
| Total | 9.49 | 10.52 | 10.8% | Capex momentum continues. |
Overview of State Government Finances
Centre-to-State transfers have expanded significantly. Total transfers increased from ₹11.5 lakh crore in FY20 to ₹25.6 lakh crore in FY26 BE, rising from 5.7% to 6.9% of GDP.
| Transfer Component | FY22 | FY23 | FY24 | FY25 RE | FY26 BE |
|---|---|---|---|---|---|
| States’ Share in Central Taxes | 9.0 | 9.5 | 11.3 | 12.9 | 14.2 |
| Centrally Sponsored Schemes | 3.4 | 4.1 | 4.3 | 4.0 | 5.3 |
| Finance Commission Grants | 2.1 | 1.7 | 1.5 | 1.3 | 1.3 |
| Other Grants / Loans / Transfers | 2.6 | 3.3 | 3.5 | 4.6 | 4.8 |
Finance Commission Grants in FY26
For FY26, the Fifteenth Finance Commission recommended ₹1,47,827 crore as grants-in-aid to States under Article 275 of the Constitution.
| Grant Category | Recommended for FY26 | Released as on 31 Dec 2025 |
|---|---|---|
| Post-Devolution Revenue Deficit Grants | ₹13,705 crore | ₹10,279 crore |
| Local Body Grants | ₹76,821 crore | ₹25,884 crore |
| Health Sector Grants | ₹15,272 crore | ₹12,968 crore |
| Disaster Management Grants | ₹42,029 crore | ₹28,666 crore |
SASCI: Special Assistance to States for Capital Expenditure / Investment
SASCI provides 50-year interest-free loans to States for capital expenditure. It was launched in October 2020 and has helped protect State-level public investment amid revenue pressures.
State fiscal deficit has remained broadly stable around 2.8% of GDP post-pandemic, but revenue deficits are rising. The number of States in revenue surplus fell from 19 in FY19 to 11 in FY25 PA.
Unconditional Cash Transfers: Fiscal Trade-Offs
The Survey raises concerns about the rapid expansion of unconditional cash transfers across States. Such transfers provide immediate income support but may increase expenditure rigidity and crowd out capital expenditure, health, education and employment-generating investments.
Debt Profile of the Government
The Central Government’s debt management strategy is based on three principles: maintaining low and stable borrowing cost, mitigating rollover, interest-rate and currency risks, and supporting government securities market development.
Central Government Debt
The medium-term goal is to reduce the Central Government’s debt-to-GDP ratio to 50 ± 1% by FY31. This debt anchor gives flexibility while preserving credibility in an uncertain global environment.
| Debt Risk | Survey Finding | UPSC Interpretation |
|---|---|---|
| Rollover Risk | Only 27% of outstanding debt matures over the next five years. | Refinancing pressure remains manageable. |
| Interest Rate Risk | Floating-rate debt is only 4.1% of outstanding debt at end-FY24. | Interest payments are more predictable. |
| Currency Risk | External debt is about 2.6% of GDP and largely concessional. | Public debt is insulated from exchange-rate shocks. |
| Market Development | Issuance is spread across maturities; long-duration bonds reduce rollover pressure. | Supports stability of G-Sec market. |
States’ Debt
For States, debt-GSDP ratio and interest payments-to-revenue receipts ratio are key fiscal health indicators. For 28 States combined, the debt-to-GDP ratio was 28.1% and IP/RR ratio around 12.6% in FY25 PA, but there are large variations across States.
The Survey says State borrowing costs do not adequately reflect State-specific fiscal risk. Better disclosure of off-budget liabilities, guarantees and contingent risks can help markets price State Development Loans more accurately.
General Government Finances and Debt Sustainability
General government finances combine Centre and States after netting out certain transfers. India’s general government deficit and liabilities remain above pre-pandemic levels but have followed a consolidation path after the pandemic.
Fiscal Response Function and Sustainability
The Survey uses a fiscal response function to assess India’s debt sustainability. The key conclusion is that India’s fiscal policy has historically responded to rising debt by improving the primary balance, which supports debt sustainability in the Bohn sense.
| Variable | Coefficient | Meaning |
|---|---|---|
| Lagged Debt-to-GDP | 0.063 | Higher debt induces improvement in primary balance. |
| Output Gap | 0.355 | Primary balance improves when output is above trend. |
| Government Spending Gap | -0.709 | Temporary spending spikes worsen primary balance. |
| Fiscal Reform Dummy | 1.548 | Fiscal rules and reforms strengthened discipline. |
Sustainable debt is not just about low borrowing. It is about using borrowing for productive investment that raises growth, attracts private capital and increases future revenues.
Conclusion and Fiscal Outlook
The chapter concludes that India’s recent fiscal performance reflects a careful balance between growth imperatives and fiscal prudence. The Centre’s transparent medium-term debt glide path has improved policy credibility and helped preserve fiscal flexibility.
- GST 2.0 and personal income tax reforms are expected to simplify tax structures and broaden the tax base.
- Digital systems in tax administration and public financial management are expected to improve compliance and transparency.
- State-level fiscal discipline matters because markets price government debt on a consolidated basis.
- Unconditional cash transfers need better targeting, periodic review and outcome orientation.
- Fiscal capacity of local bodies should be strengthened to improve grassroots-level expenditure outcomes.
UPSC Prelims, Mains and Essay Takeaways
- Centre fiscal deficit: 9.2% in FY21, 4.8% in FY25 PA, 4.4% in FY26 BE.
- Revenue receipts rose from 8.5% to 9.1% of GDP.
- Direct tax share reached 58.8% in FY25 PA.
- GST collections: ₹17.4 lakh crore during April–December 2025.
- Effective capex reached 4% of GDP in FY25 PA.
- Debt target: 50 ± 1% of GDP by FY31.
- Fiscal consolidation can be growth-friendly when capex is protected.
- Revenue buoyancy is linked to formalisation, technology and compliance.
- GST 2.0 may support demand, compliance and competitiveness.
- SASCI helps States maintain capital expenditure during fiscal stress.
- Open-ended cash transfers can reduce fiscal flexibility.
- Debt sustainability depends on growth, primary balance and expenditure quality.
- Credible consolidation and macroeconomic stability.
- Growth with fiscal prudence.
- Public investment as a growth multiplier.
- Digital governance in taxation and expenditure.
- Welfare versus productivity-enhancing expenditure.
- Fiscal federalism and cooperative discipline.
Key Terms Explained
| Term | Simple Meaning | UPSC Use |
|---|---|---|
| Fiscal Deficit | Government’s total borrowing requirement. | Use in budgeting and debt questions. |
| Revenue Deficit | Borrowing used to finance revenue expenditure. | Useful for expenditure quality analysis. |
| Primary Deficit | Fiscal deficit minus interest payments. | Shows current fiscal stance excluding past debt burden. |
| Tax Buoyancy | Responsiveness of tax revenue to GDP growth. | Use in revenue mobilisation answers. |
| Effective Capex | Capital expenditure plus grants for creation of capital assets. | Shows broader asset-creating expenditure. |
| SASCI | 50-year interest-free loans to States for capital expenditure. | Use in fiscal federalism and capex answers. |
| JIT Fund Release | Funds released only when expenditure is incurred. | Use in public financial management answers. |
| Fiscal Response Function | Shows how primary balance responds to debt. | Use in debt sustainability analysis. |
Internal Links for UPSC Economy Preparation
Continue your preparation with the Economic Survey 2025-26 complete summary for UPSC. You can also use these related IASment study sections:
- Previous Chapter: Economic Survey 2025-26 Chapter 1 State of the Economy
- UPSC Economy Notes for concept clarity.
- UPSC Prelims Economy Strategy for MCQ-focused preparation.
- UPSC Mains GS Paper 3 Economy Notes for analytical answer writing.
FAQs on Economic Survey 2025-26 Chapter 2
What is Economic Survey 2025-26 Chapter 2 about?
It is about fiscal developments in India, especially credible fiscal consolidation, revenue mobilisation, GST 2.0, expenditure quality, capital expenditure, State finances and debt sustainability.
Why is this chapter important for UPSC?
This chapter is important for GS Paper 3 Economy, Government Budgeting, fiscal federalism, public debt, taxation, welfare expenditure, capital expenditure and Essay topics on growth with stability.
What is the most important fact from this chapter?
The most important fact is that the Centre’s fiscal deficit declined from 9.2% of GDP in FY21 to 4.8% in FY25 PA and is budgeted at 4.4% in FY26, while capital expenditure has been protected.
What is GST 2.0?
GST 2.0 refers to the rationalised GST rate structure with an 18% standard rate, 5% merit rate and 40% demerit or sin-goods rate for select items, effective from 22 September 2025.
What does the chapter say about capital expenditure?
The chapter says capex has been scaled up from an average of 1.7% of GDP pre-pandemic to about 2.9% post-pandemic, while effective capex reached 4% of GDP in FY25 PA.
What is SASCI?
SASCI is the Scheme for Special Assistance to States for Capital Expenditure or Investment. It provides 50-year interest-free loans to States to support capital expenditure and reforms.
What is the chapter’s concern about unconditional cash transfers?
The chapter says unconditional cash transfers provide immediate support but can increase expenditure rigidity and crowd out resources for capital expenditure, health, education and employment-generating investments.
What is India’s medium-term debt target?
The Central Government has announced a medium-term debt target of 50 ± 1% of GDP by FY31.
Official Source and Chapter Navigation
For the official document, refer to the Official Economic Survey 2025-26 source.
This IASment page is a UPSC-oriented educational summary prepared for revision, conceptual clarity and exam use.