economy · 2026-10-01
Why India's gap between income and spending is widening
Photo: Government of India / Wikimedia (GODL-India)
India's deficit is the gap between what the government earns and spends, and it has already used up 41.9% of its yearly target in just five months.
What does fiscal deficit actually measure?
The fiscal deficit is the gap between what the government spends and what it earns, not counting the money it borrows. In simple terms, it's how much the government has to borrow to cover its bills. For this year, that gap is budgeted at Rs 16.96 lakh crore. By August, it had already used 41.9% of that limit.
Is borrowing for roads different from borrowing for salaries?
Yes. Borrowing for roads funds capital expenditure, building assets that can generate future returns. Borrowing for salaries is revenue expenditure, paying for ongoing consumption with no future income. The widening revenue deficit, Rs 2.76 lakh crore at 46.5% of target, shows the government borrowing for day-to-day bills.
Who pays for the interest on all that borrowed money?
The interest bill is a major fixed cost in the budget, set at Rs 5.15 lakh crore in just five months, 36.7% of the year's target. Interest payments eat up 26% of total expenditure and 40% of revenue receipts, meaning nearly half of what the government earns from taxes and other non-borrowed income goes to paying past lenders before a single rupee is spent on new projects or salaries. The borrower's cost is borne by today's taxpayer, and the burden compounds if deficits keep widening.
Can the government keep borrowing this way without hurting the economy?
The budget plans net market borrowings of Rs 11.7 lakh crore this year, with gross borrowings at Rs 17.2 lakh crore, to finance the deficit. Servicing that debt already consumes 40% of revenue receipts, leaving less for fresh spending. The government has committed to cutting outstanding liabilities to about 50% of GDP by March 2031, down from an estimated 55.6% now. Our read: the pace of borrowing is sustainable only if the deficit narrows as planned, because interest costs compound and crowd out room for new projects.
What happens if interest payments keep eating up revenue receipts?
Interest already consumes 40% of revenue receipts, so each new rupee of borrowing reduces the share left for new spending. If the deficit misses its 4.3% of GDP target, the gap between borrowing and repayment widens, pushing interest costs higher next year. The government's plan to cut liabilities to 50% of GDP by 2031 depends on the deficit narrowing as budgeted. Our read: this is why the budget protects interest payments even when other spending gets squeezed.
Where does the remaining borrowed money come from?
Market borrowings cover only part of the deficit. The government plans net market borrowings of Rs 11.7 lakh crore, with gross borrowings at Rs 17.2 lakh crore, and the balance from small savings schemes and other sources. These small savings funds come from household deposits in post office schemes and provident funds, giving the government a captive pool of domestic savings. Our read: this dependence on small savings is why the government protects interest rates on these schemes even when it wants to cut borrowing costs.
What are the hidden costs of borrowing from small savings schemes?
Small savings funds come from household deposits in post office schemes and provident funds, giving the government a captive pool of domestic savings. These schemes carry fixed interest rates that the government protects, even when market rates fall. The cost is that the government pays a premium over market borrowing rates to keep these schemes attractive, and this premium adds to the interest burden that already eats up 40% of revenue receipts. Our read: this is why the budget shields small savings rates when it wants to cut borrowing costs, because losing that captive pool would force costlier market borrowing.
Who ultimately bears the cost of all this borrowing?
The cost of borrowing is carried by today's taxpayer and future generations. Interest payments already consume 40% of revenue receipts, meaning nearly half of what the government earns from taxes goes to past lenders. The government plans to reduce its debt to 50% of GDP by 2031, from the current 55.6%, which requires fiscal discipline. As the deficit narrows, less money goes to interest, freeing room for productive spending. Our read: the real burden falls on future taxpayers, since today's borrowing today must be repaid with tomorrow's tax revenue.
Why expect the gap to shrink if spending is ahead now?
Spending being ahead now does not mean it stays ahead all year. In April-August, the government spent 38.9% of its annual budget, versus 37.1% last year. But the budget targets a deficit of 4.3% of GDP (the size of the economy), down from 4.4% last year, relying on spending to slow later with receipts rising.
Can the government reach its deficit target without cutting spending?
The target requires the deficit to stay at 4.3% of GDP, down from 4.4% last year, which depends on receipts catching up and spending slowing later. Receipts are at 37.5% of target versus 36.7% last year, so tax collection is ahead. But capital expenditure is also ahead at 41.7% of target, and interest and subsidies are non-negotiable. Our read: meeting the target will force a squeeze on revenue spending in the second half, especially on subsidies and other discretionary items, because the big-ticket outlays are already committed.
Does the government rely on loans for a quarter of its money?
Yes. The budget documents show borrowings and other liabilities finance about 24% of the government's income, nearly a quarter. The rest comes from direct taxes (39%) and indirect taxes like GST (a goods and services tax) (15%).
Why is the deficit wider than last year?
The deficit is wider because spending is growing faster than income. Total spending reached 38.9% of its yearly target by August, up from 37.1% last year. Income, meanwhile, crept up to 37.5% from 36.7%. The gap you see is that difference. Subsidies and interest payments are pushing the spending side up.
How does interest become the biggest bill?
Interest becomes the biggest bill because the government must pay interest on its past borrowing, which compounds as it keeps borrowing to cover its deficit. In the first five months of 2026-27, interest payments reached Rs 5.15 lakh crore, and interest is budgeted to take up 26% of total expenditure.
Can the government keep borrowing to cover the gap?
The budget itself lays out the borrowing plan: net market borrowings of Rs 11.7 lakh crore and gross borrowings of Rs 17.2 lakh crore are estimated for 2026-27, with the rest from small savings and other sources. The government targets bringing its debt down from 55.6% of GDP this year to around 50% by March 2031. So borrowing continues to finance the deficit, but the debt-reduction target is the constraint that caps how much more it can take on. Our read: the ceiling on borrowing is the debt-to-GDP goal, not any single year's budget.
If the government already owes a debt equal to 55.6% of GDP, what happens when interest rates rise?
When interest rates rise, the cost of servicing that debt goes up automatically. Interest payments already take up 26% of total expenditure and 40% of revenue receipts. The budget plans net market borrowings of Rs 11.7 lakh crore this year, so each new bond carries the current rate. Higher rates mean more of each year's revenue goes to past borrowing, leaving less for new spending or capital investment. Our read: the debt-to-GDP target is the constraint, but interest rates decide how painful the path to it is.
If higher rates make debt costlier, who ultimately pays for that?
Higher rates raise the government's interest bill, and that bill is met from tax revenue, since interest payments already absorb 40% of revenue receipts. When rates rise, the government either cuts other spending like capital expenditure, which fell behind at 41.7% of target, or borrows more, which pushes up future interest further. The burden ultimately falls on taxpayers and on future spending on infrastructure and welfare. Our read: the cost lands on growth, since capex is the first item squeezed.
If interest already eats 26% of spending, how much room is left to cut?
Once interest, salaries, and pensions are fixed, the flexible part is roughly capital expenditure, which the budget pegs at Rs 12.22 lakh crore. That is the pool available for cuts, but the government wants it 7.7% higher, not lower. Revenue expenditure, at 38% of target, is the other side, yet subsidies alone already consume Rs 1.87 lakh crore. Our read: the real trade-off is between cutting capex or missing the deficit target.
Where does the burden of these UPI charges actually land?
The charges land on medium and large merchants and wallet users, not small shops. Small merchants face zero MDR on bank-to-bank UPI, so they are unaffected. For wallets, interchange fees apply only above Rs 2,000 for medium and large merchants, plus a 0.15% wallet-loading fee above Rs 2,000. Merchants can absorb or pass on the cost to customers. Our read: the burden falls on those with larger transaction volumes, while small merchants remain protected by the zero-MDR mandate.
Who really pays when merchants pass on UPI fees?
When a merchant is charged an interchange fee on a PPI transaction above ₹2,000, they can pass it on to the customer in the form of higher prices. That means the end consumer ultimately bears the cost. Small merchants with bank-to-bank UPI face no such fee due to the zero-MDR mandate, so they are protected. Our read: the burden shifts to customers of larger merchants, who see the charge baked into what they pay.
Is 41.9% of the limit a lot with seven months left?
Yes, 41.9% with five months elapsed, not seven, is within the normal range. Spending is front-loaded, especially capital expenditure at 41.7% of target. Revenue deficit is higher at 46.5%, but the government targets a lower 4.3% deficit for the full year, so this pace is broadly on track.
Why would higher UPI charges not scare off small merchants?
Small merchants face no interchange on UPI because the zero MDR mandate applies to bank-to-bank transfers, and wallet-based fees only kick in above Rs 2,000 for medium and large merchants. The wallet-loading charge is paid by the wallet issuer, not the merchant. For most small shops, UPI remains free, so the cost increase is invisible to them. Our read: the burden falls on big merchants and wallet firms, which can absorb or pass it on.
Why not cut spending instead of raising small taxes?
The government chose small tax rises over spending cuts because it is committed to raising total spending 7.7% this year, prioritizing infrastructure and welfare. Interest payments, 26% of expenditure, are fixed, making cuts hard. New taxes on share buybacks, securities transactions, and changes to the minimum corporate tax nudge revenue up without austerity.
Source: economictimes.indiatimes.com