New Delhi, June 18: A sharper focus on capital expenditure and improving revenue collections are reshaping India’s fiscal landscape and setting the stage for stronger growth with lower inflation, according to a new report by Morgan Stanley.
The brokerage says India’s fiscal policy has undergone a notable shift since the pandemic, with both the Centre and states pushing up capital spending. The Centre’s capital expenditure has doubled from 1.6% of GDP in FY2020 to 3.2% in FY2025, while states have increased theirs from 1.9% to 2.3% over the same period.
“The faster pace of fiscal consolidation and improved spending quality are positive for growth and inflation outcomes,” the report notes.
The Centre’s fiscal deficit is expected to shrink to 4.4% of GDP by FY2026, while states are projected to narrow their deficits to 2.6%. The report adds that this steady consolidation, driven not by cuts but by smarter spending, is a structural improvement that strengthens macroeconomic stability.
Morgan Stanley also flags India’s inflation management as a standout success, supported by a flexible inflation-targeting regime. CPI inflation has averaged 4.9% since 2016, compared to 7.7% in the four years before.
Meanwhile, tax revenues are showing healthy buoyancy. The Centre’s gross tax revenue is expected to hit 11.5% of GDP in FY2025, up from 9.9% in FY2020. It has remained stable in the 11.3–11.7% range over the last four years. Tax buoyancy, the growth in tax revenue relative to GDP growth – has improved from 0.9 pre-pandemic to 1.2 on average post-pandemic.
Non-tax revenues have also surged, helped by record dividend payouts from the Reserve Bank of India and public sector undertakings (PSUs). Their contribution has tripled from 0.3% of GDP in FY2021 to 0.9% in FY2025. RBI alone is estimated to transfer a record Rs 2.7 lakh crore to the Centre in FY2026, or 0.7% of GDP.
PSU dividends rose 16% in FY2025, totalling Rs 74,000 crore, led by Coal India and ONGC.
With revenue inflows strong and spending priorities shifting toward infrastructure, the report says India is better positioned to maintain growth momentum while keeping inflation and borrowing costs in check.
