The RBI Annual Report FY 2025-26 shows that India continued on a path of post-pandemic fiscal consolidation while retaining a strong emphasis on capital expenditure. The Central Government brought its gross fiscal deficit (GFD) down to 4.4% of GDP in 2025-26 (RE) from 4.8% in 2024-25, while higher-than-budgeted non-tax revenue and expenditure rationalisation supported the improvement. At the same time, states continued to run larger deficits than the Centre, and the Sixteenth Finance Commission introduced changes intended to strengthen performance incentives and fiscal discipline. For RBI Grade B, UPSC and other competitive examinations, this chapter is particularly important because it combines fiscal deficit, taxation, public expenditure, government borrowing, Centre-State finances and debt sustainability.

1. The Big Picture: Fiscal Consolidation Continues

The central message of the government-finance chapter is straightforward:

India continued its post-pandemic fiscal consolidation without abandoning capital expenditure.

The Centre’s GFD declined from:

4.8% of GDP in 2024-25

4.4% of GDP in 2025-26 (RE).

This enabled the Centre to achieve the objective of bringing the fiscal deficit below 4.5% of GDP in 2025-26.

For 2026-27, the Budget has targeted:

GFD = 4.3% of GDP

Thus:

2024-25 → 4.8%

2025-26 RE → 4.4%

2026-27 BE → 4.3%

This represents a continued gradual reduction rather than abrupt fiscal tightening.

2. What Is Fiscal Deficit?

Before memorising the numbers, understand the concept.

Fiscal Deficit

Fiscal deficit broadly represents the government’s total expenditure in excess of its receipts, excluding borrowings.

In simplified form:

Fiscal Deficit = Total Expenditure − Total Receipts excluding Borrowings

It indicates the amount that the government needs to finance through borrowing and other financing sources.

Why is it important?

A persistently high fiscal deficit can:

increase government borrowing requirements,
influence interest rates,
affect government debt,
create pressure on financial markets,
and potentially constrain fiscal space.

However, the quality of expenditure matters enormously.

Borrowing to finance productive capital expenditure has different long-term implications from borrowing predominantly to finance recurring consumption expenditure.

That is why the RBI report places considerable emphasis on the quality of public expenditure.

3. Centre’s Fiscal Performance in 2025-26

The following table captures the core numbers.

Indicator	2024-25	2025-26 RE	2026-27 BE
Non-debt total receipts	₹30.8 lakh cr	₹34.1 lakh cr	₹36.5 lakh cr
Gross tax revenue	₹38.0 lakh cr	₹40.8 lakh cr	₹44.0 lakh cr
Net tax revenue	₹25.0 lakh cr	₹26.7 lakh cr	₹28.7 lakh cr
Non-tax revenue	₹5.4 lakh cr	₹6.7 lakh cr	₹6.7 lakh cr
Total expenditure	₹46.5 lakh cr	₹49.6 lakh cr	₹53.5 lakh cr
Revenue expenditure	₹36.0 lakh cr	₹38.7 lakh cr	₹41.3 lakh cr
Capital expenditure	₹10.5 lakh cr	₹11.0 lakh cr	₹12.2 lakh cr
Revenue deficit	₹5.6 lakh cr	₹5.3 lakh cr	₹5.9 lakh cr
Gross fiscal deficit	₹15.7 lakh cr	₹15.6 lakh cr	₹17.0 lakh cr

Figures in parentheses in the report are percentages of GDP.

4. Why Did the Fiscal Deficit Fall?

The decline in the Centre’s GFD from 4.8% to 4.4% of GDP was primarily associated with:

Higher-than-budgeted non-tax revenue
Rationalisation of expenditure

This is an important distinction.

Fiscal consolidation does not necessarily require every category of expenditure to decline. It can occur through a combination of:

Higher receipts + expenditure management + economic growth

5. Revenue Expenditure Increased

Revenue expenditure increased by:

7.4% in 2025-26 (RE)

over 2024-25.

The major drivers were:

higher interest payments,
major subsidies.

Major subsidies exceeded their budgeted amount by:

₹46,327 crore

The principal contributors were higher:

food subsidies,
fertiliser subsidies.

Exam Point

Do not assume that fiscal consolidation means revenue expenditure necessarily falls.

In FY 2025-26:

Fiscal deficit declined even though revenue expenditure increased.

The key was that receipts and expenditure dynamics together produced a lower deficit ratio.

6. Capital Expenditure Remained a Priority

One of the strongest features of the fiscal strategy was the continued emphasis on capital expenditure.

Central government capital expenditure in 2025-26 (RE) was:

₹11.0 lakh crore

or approximately:

3.1% of GDP

This was broadly in line with the Budget Estimates, although actual capital expenditure undershot the budgeted amount by:

₹25,335 crore

7. Effective Capital Expenditure

An important concept for RBI Grade B is effective capital expenditure.

The report states that effective capital expenditure remained broadly unchanged at:

3.9% of GDP in 2025-26 (RE)
compared with 4.0% in 2024-25.

Why distinguish capital expenditure and effective capital expenditure?

Capital expenditure directly undertaken by the government is one component.

Effective capital expenditure additionally captures relevant capital-creating transfers, particularly those associated with grants for creation of capital assets.

For examination purposes:

Capital expenditure ≠ effective capital expenditure.

Do not interchange the two.

8. Tax Revenue: A Major Support to Fiscal Consolidation

Gross tax revenue expanded by:

7.4% in 2025-26 (RE)

The increase was largely driven by:

accelerated corporation-tax growth,
double-digit growth in excise duty,
double-digit growth in customs.

Gross tax revenue stood at:

11.4% of GDP

broadly unchanged from 2024-25.

9. Direct vs Indirect Taxes

The report provides an important composition of gross tax revenue.

FY 2025-26 RE

Direct tax: ₹24.2 lakh crore
Indirect tax: ₹16.6 lakh crore

Total:

Gross tax revenue = ₹40.8 lakh crore

As percentages of GDP:

Direct tax: 6.8%
Indirect tax: 4.6%

Exam Memory

Gross Tax Revenue 2025-26 RE = ₹40.8 lakh crore

Break-up:

Direct = ₹24.2 lakh crore

Indirect = ₹16.6 lakh crore

10. Net Tax Revenue

Net tax revenue increased by:

7.0%

in 2025-26 (RE).

It reached:

₹26.7 lakh crore

compared with ₹25.0 lakh crore in 2024-25.

Remember the distinction:

Gross tax revenue ≠ net tax revenue

Net tax revenue accounts for the relevant tax devolution/transfers to states and other adjustments reflected in the government’s fiscal accounts.

11. Non-Tax Revenue: A Major Positive Surprise

This was one of the most important contributors to fiscal consolidation.

Non-tax revenue increased by:

24.4% in 2025-26 (RE)

It reached:

₹6.7 lakh crore

and exceeded its Budget Estimate by:

₹84,662 crore

This is an extremely important factual number for exam preparation.

Fiscal Consolidation Chain

Higher non-tax revenue

↓

Higher non-debt receipts

↓

Lower borrowing requirement relative to expenditure

↓

Support to fiscal consolidation

12. Non-Debt Capital Receipts Recovered

Non-debt capital receipts also recovered strongly.

They grew by:

53.1% in 2025-26 (RE)

after contracting in 2024-25.

Overall, total non-debt receipts grew by 10.7% during 2025-26 (RE).

Exam Point

Three numbers worth remembering:

Non-tax revenue growth: 24.4%
Non-debt capital receipts growth: 53.1%
Total non-debt receipts growth: 10.7%

13. India’s Fiscal Consolidation Since the Pandemic

The fiscal deficit had reached a peak of:

9.2% of GDP in 2020-21

Since then, the Centre has progressively reduced it.

The trajectory highlighted in the report is:

2020-21 → 9.2%

↓

2024-25 → 4.8%

↓

2025-26 RE → 4.4%

↓

2026-27 BE → 4.3%

This is perhaps the single most important fiscal-consolidation trend to remember.

14. Quality of Fiscal Consolidation

The RBI does not look only at the size of the fiscal deficit.

It also examines the composition of expenditure.

The report notes that the:

revenue expenditure-to-capital outlay relationship,
and revenue deficit as a proportion of GFD,

have broadly exhibited a declining trend in recent years.

This indicates an improvement in the quality of public expenditure.

Why?

Suppose two governments have the same fiscal deficit.

Government A spends predominantly on recurring revenue expenditure.

Government B spends more on productive capital assets.

The long-term economic implications can be quite different.

Capital expenditure can create:

infrastructure,
productive capacity,
connectivity,
crowding-in effects on private investment.

Therefore:

Fiscal consolidation is stronger when deficit reduction occurs alongside preservation of productive capital expenditure.

15. Fiscal Deficit Target for 2026-27

The Union Budget 2026-27 has targeted:

GFD = 4.3% of GDP

This is down from:

4.4% in 2025-26 RE.

The report therefore views the fiscal strategy as a continuation of the post-pandemic consolidation path.

16. Capital Expenditure in 2026-27

Capital expenditure is budgeted to grow by:

11.5% in 2026-27

This is particularly important because it shows that fiscal consolidation is not being pursued by simply cutting public investment.

The policy combination:

Lower fiscal deficit

Higher capital expenditure

Improved quality of fiscal consolidation

This is a very useful analytical point for descriptive answers.

17. Tax Revenue Outlook for 2026-27

Gross tax revenue is budgeted to decline marginally as a share of GDP:

11.2% of GDP in 2026-27

from 11.4% in 2025-26 RE.

Indirect taxes are budgeted at:

4.3% of GDP

One reason is the discontinuation of the GST compensation cess by the Centre from February 1, 2026.

18. Government Borrowing

Fiscal deficit has to be financed.

For 2026-27, the Centre has budgeted:

Gross market borrowings: ₹17.2 lakh crore

compared with:

₹14.6 lakh crore in 2025-26 (RE)

Net market borrowings are budgeted at:

₹11.7 lakh crore

or approximately:

3.0% of GDP

Market borrowings and small savings remain major sources of financing the fiscal deficit.

19. Why Government Borrowing Matters for Financial Markets

This connects directly with Part 6 on financial markets.

When government borrowing rises, the supply of government securities increases.

Therefore:

Higher government borrowing

→ greater supply of G-secs

→ potential impact on bond yields

→ implications for borrowing costs across the economy.

This is why fiscal policy and monetary/financial-market conditions cannot be studied in isolation.

The Annual Report notes that global financial volatility, geopolitical tensions and fiscal developments influenced government securities markets during the year.

20. State Government Finances

The fiscal story is incomplete without the states.

For 2025-26, states had budgeted a consolidated GFD of:

3.3% of GDP

The report’s state-finance table shows:

Indicator	2024-25 RE	2025-26 BE
Non-debt receipts	₹46.0 lakh cr	₹51.8 lakh cr
Revenue receipts	₹45.8 lakh cr	₹51.3 lakh cr
Revenue expenditure	₹47.7 lakh cr	₹52.1 lakh cr
Capital expenditure	₹9.9 lakh cr	₹11.4 lakh cr
Total expenditure	₹57.7 lakh cr	₹63.6 lakh cr
Fiscal deficit	₹11.6 lakh cr	₹11.8 lakh cr

21. State Fiscal Deficit: 3.5% in 2025-26 RE

For the 24 states/UTs with relevant budget information, the key deficit indicators are:

Indicator	2024-25	2025-26 RE	2026-27 BE
Revenue deficit	0.3%	0.4%	-0.1%
GFD	3.0%	3.5%	3.0%
Primary deficit	1.5%	1.9%	1.4%

The negative revenue-deficit number for 2026-27 means a revenue surplus, since the report explicitly notes that negative deficit indicators denote surplus.

22. Why Did State Finances Face Pressure?

During April-February 2025-26, provisional accounts of 22 states showed GFD at 77.1% of their Budget Estimates, compared with 64.3% a year earlier.

The report attributes this increase primarily to:

subdued revenue performance,
slower SGST collections,
contraction in grants from the Centre.

At the same time:

revenue expenditure grew more slowly than a year earlier,
capital expenditure recorded strong growth.

Important analytical point

State fiscal stress was therefore not simply an expenditure problem.

Revenue-side weakness also mattered.

23. State Fiscal Outlook for 2026-27

For 2026-27, the consolidated GFD-GSDP ratio of the 24 states/UTs covered by the report is budgeted at:

3.0%

Gross transfers to states are budgeted to increase by:

12.2%

This increase is largely associated with:

centrally sponsored schemes,
special assistance for capital investment.

24. 50-Year Interest-Free Loans to States

A particularly important policy measure is the continuation of the scheme of:

50-year interest-free loans for capital expenditure

The total outlay for this purpose is:

₹2 lakh crore

in 2026-27, representing an increase of:

33.3%

over the 2025-26 (RE) level.

Why is this important?

It provides states with financing support specifically linked to capital expenditure.

Thus, the Centre is attempting to support:

State-level public investment

without relying solely on conventional revenue transfers.

25. Sixteenth Finance Commission

The Sixteenth Finance Commission (FC-XVI) covers:

2026-27 to 2030-31

The report states that it provides continuity in Centre-State fiscal relations while strengthening incentives for:

performance,
fiscal discipline.

26. States’ Share in Divisible Tax Pool

One of the most important facts:

States’ share remains 41%

of the divisible tax pool.

This is a very high-probability factual question for competitive examinations.

Remember:

FC-XVI → 2026-27 to 2030-31

States’ vertical share → 41%

27. Changes in Horizontal Devolution

The Finance Commission also modified the criteria used for distributing the states’ share horizontally.

The major change was greater emphasis on population, while the weights of:

area,
income distance,
demographic performance

were adjusted downward.

The weight for forest cover was retained.

The tax-effort criterion was removed.

A new criterion was introduced:

Contribution to GDP — 10%

28. FC-XVI Horizontal Devolution Formula

The report gives the following FC-XVI weights:

Criterion	Weight
Population	17.5%
Area	10%
Forest cover	10%
Income distance	42.5%
Demographic performance	10%
Contribution to GDP	10%
Total	100%

Very Important Exam Point

The new criterion is:

States’ contribution to GDP — 10%

The report links this to India’s growth ambitions and the need to recognise the role of states in national economic performance.

29. Revenue Deficit Grants Discontinued

Another important recommendation concerns revenue deficit grants.

Post-devolution, revenue deficit grants have been discontinued.

The rationale is to promote:

fiscal discipline,
sustainable state budgets.

The Finance Commission considered existing revenue deficits to reflect, in significant part, gaps in:

revenue mobilisation,
expenditure management.

The underlying logic

If states repeatedly expect central transfers to fill structural revenue gaps:

Expectation of support

→ weaker incentive to increase own revenues

→ weaker incentive to rationalise expenditure

→ weaker fiscal adjustment incentives.

Therefore, the FC-XVI approach emphasises greater fiscal responsibility.

30. General Government Finances

The general government combines the finances of:

Centre,
states.

This gives a broader picture of India’s public-sector fiscal position.

The general government’s GFD moderated from:

7.8% of GDP in 2024-25 (RE)

to:

7.2% of GDP in 2025-26 (BE).

31. General Government Debt

The general government’s debt-to-GDP ratio was budgeted to increase marginally to:

81.9% of GDP in 2025-26 (BE)

The report attributes part of this to higher state liabilities.

However, external liabilities were only:

2.5% of GDP

This implies limited exchange-rate risk in the government’s debt structure.

32. Why Is Low External Debt Important?

Suppose a government has substantial foreign-currency debt.

If its domestic currency depreciates sharply:

INR depreciation → domestic-currency value of foreign debt rises → debt-service burden can increase.

The report notes that India’s relatively low external liabilities imply limited exchange-rate risk in this respect.

This becomes particularly relevant when studied alongside the 9.9% rupee depreciation discussed in Part 7.

33. General Government Revenue and Expenditure

The general government’s tax revenue increased to:

19.1% of GDP in 2025-26 (BE)

from:

18.4% in 2024-25.

Meanwhile, total expenditure remained unchanged at:

29.6% of GDP

in both years.

Capital expenditure increased to:

5.8% of GDP

from 5.6% in 2024-25.

This again demonstrates the emphasis on maintaining public investment even while pursuing fiscal consolidation.

34. Centre vs States vs General Government

This comparison is extremely useful for revision.

Indicator	Centre 2025-26	States 2025-26	General Government 2025-26
Fiscal deficit	4.4% GDP	3.5%	7.2%
Key debt indicator	Centre debt 56.1% GDP	—	Debt 81.9% GDP
Capital expenditure	3.1% GDP	3.2% GDP	5.8% GDP

Centre figures are RE; state and general-government figures use the classifications specified in the report.

Important caution

Do not mechanically compare these figures without checking the report’s BE/RE classification and denominator.

For Centre figures, fiscal ratios are generally expressed as a percentage of GDP; state ratios are expressed relative to GSDP where specified.

35. Centre’s Debt-to-GDP Ratio

The Centre’s debt-to-GDP ratio is budgeted to decline from:

56.1% in 2025-26 (RE)

to:

55.6% in 2026-27 (BE).

This is consistent with the broader fiscal-consolidation strategy.

36. Fiscal Deficit vs Revenue Deficit vs Primary Deficit

This is a favourite conceptual area in RBI Grade B and UPSC examinations.

Fiscal Deficit

Measures the government’s overall borrowing requirement.

Revenue Deficit

Revenue Expenditure − Revenue Receipts

It indicates whether the government is borrowing to finance its recurring/revenue expenditure.

Primary Deficit

Fiscal Deficit − Interest Payments

It indicates the current fiscal imbalance excluding the burden of past debt-interest payments.

Why primary deficit matters

If fiscal deficit is high but primary deficit is relatively low, a substantial portion of the deficit may be explained by interest payments arising from accumulated debt.

37. The Fiscal Consolidation Story in One Diagram

The entire chapter can be remembered through this chain:

Post-pandemic GFD peak: 9.2% in 2020-21

↓

Fiscal consolidation

↓

GFD: 4.8% in 2024-25

↓

GFD: 4.4% in 2025-26 RE

↓

GFD target: 4.3% in 2026-27 BE

At the same time:

Capital expenditure maintained

↓

Capex: 3.1% of GDP in 2025-26

↓

Capex growth budgeted at 11.5% in 2026-27

38. Fiscal Consolidation Does Not Mean Austerity

This distinction is important for descriptive answers.

The RBI report’s assessment suggests a model of:

Consolidation + Growth-supportive expenditure

rather than:

Consolidation through indiscriminate expenditure cuts

The government reduced the fiscal deficit while maintaining emphasis on capital expenditure.

The RBI concludes that the 2026-27 Budget continues the post-pandemic fiscal-consolidation path and considers this favourable for medium-term growth.

39. Fiscal Policy and Monetary Policy: The Connection

This chapter also connects directly to monetary policy.

Government borrowing influences:

G-sec supply,
bond yields,
liquidity conditions,
financial-market expectations.

Meanwhile, monetary policy influences:

borrowing costs,
demand,
investment,
government interest costs,
and the transmission of financial conditions.

Therefore:

Fiscal policy and monetary policy are institutionally distinct but financially interconnected.

For RBI Grade B, this is a valuable interview and descriptive-answer theme.

40. Public Debt: What You Must Remember

The report provides several different debt-related numbers.

Centre

Debt-to-GDP: 56.1% in 2025-26 RE

→ 55.6% in 2026-27 BE

General Government

Debt-to-GDP: 81.9% in 2025-26 BE

General Government External Liabilities

2.5% of GDP

Do not mix these three numbers.

41. High-Value Fiscal Numbers for RBI Grade B

If you are short on revision time, memorise these first:

Centre

GFD 2025-26 RE: 4.4% of GDP
GFD 2024-25: 4.8%
GFD 2026-27 BE: 4.3%
Pandemic peak GFD: 9.2% in 2020-21
Revenue expenditure: ₹38.7 lakh crore
Capital expenditure: ₹11.0 lakh crore
Capex/GDP: 3.1%
Effective capex/GDP: 3.9%
Gross tax revenue: ₹40.8 lakh crore
Net tax revenue: ₹26.7 lakh crore
Non-tax revenue: ₹6.7 lakh crore
Non-tax revenue growth: 24.4%
Non-debt capital receipts growth: 53.1%

Borrowing

2026-27 gross market borrowing: ₹17.2 lakh crore
2026-27 net market borrowing: ₹11.7 lakh crore
Net borrowing/GDP: 3.0%

States

2025-26 GFD: 3.5%
2026-27 GFD: 3.0%
2026-27 gross transfers growth: 12.2%
50-year interest-free capex loans: ₹2 lakh crore

Finance Commission

FC-XVI period: 2026-27 to 2030-31
States’ share in divisible pool: 41%
Contribution to GDP criterion: 10%
Revenue deficit grants: discontinued

General Government

GFD 2025-26: 7.2%
Debt/GDP: 81.9%
External liabilities: 2.5% of GDP
Tax revenue: 19.1% of GDP
Capital expenditure: 5.8% of GDP

42. Most Probable RBI Grade B / UPSC Questions

Q1. What was India’s Central Government GFD in 2025-26?

Answer: 4.4% of GDP (RE).

Q2. What is the GFD target for 2026-27?

Answer: 4.3% of GDP.

Q3. What was the peak Central GFD after the pandemic?

Answer: 9.2% of GDP in 2020-21.

Q4. What was Central Government capital expenditure in 2025-26 RE?

Answer: ₹11.0 lakh crore, or 3.1% of GDP.

Q5. What was effective capital expenditure as a percentage of GDP?

Answer: 3.9%.

Q6. By how much did non-tax revenue grow?

Answer: 24.4%.

Q7. What was the Centre’s gross tax revenue in 2025-26 RE?

Answer: ₹40.8 lakh crore.

Q8. What was the Centre’s gross market borrowing budgeted for 2026-27?

Answer: ₹17.2 lakh crore.

Q9. What is the states’ share in the divisible tax pool under FC-XVI?

Answer: 41%.

Q10. What new criterion has been introduced in horizontal devolution?

Answer: States’ contribution to GDP, with a 10% weight.

Q11. What is the consolidated GFD of states budgeted for 2026-27?

Answer: 3.0%.

Q12. What was the general government’s GFD in 2025-26?

Answer: 7.2% of GDP.

Q13. What was general-government debt-to-GDP?

Answer: 81.9%.

Q14. What were general-government external liabilities?

Answer: 2.5% of GDP.

RBI Annual Report FY 2025-26 — Key Takeaways

The Centre’s GFD declined to 4.4% of GDP in 2025-26 RE from 4.8%.
The Centre achieved the objective of keeping GFD below 4.5%.
GFD is budgeted at 4.3% of GDP in 2026-27.
The post-pandemic GFD peak was 9.2% of GDP in 2020-21.
Fiscal consolidation was supported by higher-than-budgeted non-tax revenue and expenditure rationalisation.
Revenue expenditure grew 7.4%, mainly because of interest payments and major subsidies.
Major subsidies exceeded budget estimates by ₹46,327 crore.
Capital expenditure remained at 3.1% of GDP in 2025-26 RE.
Effective capital expenditure was 3.9% of GDP.
Gross tax revenue grew 7.4%.
Non-tax revenue grew 24.4% and exceeded Budget Estimates by ₹84,662 crore.
Non-debt capital receipts grew 53.1%.
Gross market borrowing for 2026-27 is budgeted at ₹17.2 lakh crore.
States’ GFD was 3.5% in 2025-26 RE and is budgeted at 3.0% in 2026-27.
FC-XVI retains the states’ share at 41% of the divisible tax pool.
FC-XVI introduced Contribution to GDP with a 10% weight in horizontal devolution.
Revenue deficit grants have been discontinued post-devolution.
General-government GFD moderated to 7.2% of GDP.
General-government debt was 81.9% of GDP in 2025-26 BE.
General-government external liabilities were only 2.5% of GDP, implying limited exchange-rate risk.

Final RBI Grade B Revision Sheet

CENTRE

GFD: 4.4% → 4.3%
Debt/GDP: 56.1% → 55.6%
Capex: ₹11.0 lakh crore
Capex/GDP: 3.1%
Effective Capex: 3.9% GDP
Gross Tax Revenue: ₹40.8 lakh crore
Non-Tax Revenue: ₹6.7 lakh crore
Non-Tax Growth: 24.4%

BORROWING

Gross 2026-27: ₹17.2 lakh crore
Net 2026-27: ₹11.7 lakh crore
Net/GDP: 3.0%

STATES

GFD 2025-26: 3.5%
GFD 2026-27: 3.0%
Transfers growth: 12.2%
50-year interest-free capex loans: ₹2 lakh crore

FC-XVI

Period: 2026-27 to 2030-31
Vertical devolution: 41%
Contribution to GDP: 10%
Revenue deficit grants: Discontinued

GENERAL GOVERNMENT

GFD: 7.2%
Debt/GDP: 81.9%
External liabilities: 2.5%
Tax revenue: 19.1% GDP
Capex: 5.8% GDP

Final Exam Perspective

The central message of the RBI Annual Report FY 2025-26 on government finances is not merely that the fiscal deficit declined. The more important story is the quality and composition of consolidation.

The Centre reduced GFD from 4.8% to 4.4% of GDP, while maintaining capital expenditure at 3.1% of GDP and budgeting an 11.5% increase in capital expenditure for 2026-27. Revenue mobilisation—particularly non-tax revenue—also strengthened. At the state level, fiscal pressures remained more pronounced, leading the Sixteenth Finance Commission to put greater emphasis on performance and fiscal discipline.

For RBI Grade B Phase II, the strongest answer structure is:

Fiscal consolidation → revenue mobilisation → expenditure rationalisation → protection of capex → lower GFD → sustainable debt path → continued growth support.

That is the fiscal-policy story you should carry into the examination.

Next Part — Part 9:
RBI Annual Report FY 2025-26: External Sector — Exports, Imports, Current Account Deficit, Capital Flows, Foreign Exchange Reserves and the Rupee