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Why Budget Gaps Occur
A budget gap occurs when the government’s total spending is higher than its income from taxes and non-tax sources. This gap can widen when growth slows, tax collections soften, or spending commitments rise in areas such as welfare, subsidies, or interest payments. In years when the government increases public investment to support the economy, the gap also tends to expand.
Ways Government Fills the Budget Gap
To close the gap, the government borrows from the market, small savings schemes, and other financial instruments. These borrowings add to the total debt and increase the interest the government must pay every year. Stronger tax collections, disinvestment proceeds, and dividends from public sector enterprises — including the Reserve Bank of India — also help the government reduce the need for additional borrowing.
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Budget Gap vs Fiscal Deficit
The budget gap and the fiscal deficit refer to the same concept: the shortfall between income and expenditure. In India, the fiscal deficit is reported as a percentage of GDP. A higher figure means the government must borrow more to meet its spending. While all fiscal deficits reflect a budget gap, the official measure of fiscal deficit provides a clear picture of how large the imbalance is relative to the size of the economy.
Impact of Budget Gap on Economy
A widening gap pushes up government borrowing. This can raise interest rates, make credit costlier for private firms, and affect investment. Large gaps also increase sovereign debt and interest obligations, which can weaken credit ratings. If the gap stays high for long, it can strain public finances and reduce the government’s ability to respond to future economic shocks.
Moderate gaps, however, can support growth when used for capital investment or counter-cyclical spending during slowdowns.
India’s Budget Gap Trends
ndia’s fiscal deficit for FY25 stood at 4.8% of GDP, meeting the revised estimate, according to data released by the Comptroller General of Accounts on Friday. The central government’s fiscal deficit stood at Rs 15.77 lakh crore, or 100.5% of the revised annual target, compared with 95.4% a year before.
The government has proposed a fiscal deficit target of 4.4% of GDP for 2025–26, lowering it from 4.8% in the previous year and aligning with its goal of bringing the deficit below 4.5% by FY26.
Stronger tax collections and a record dividend from the Reserve Bank of India helped the government stay on track in the last financial year. To keep reducing the gap, the government may need to maintain revenue growth while ensuring that spending — particularly subsidies — stays under control, even as it continues capital investment.