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We need fiscal prudence during elections

February 16, 2026 4 min read Economics Polity & Governance GS Paper 2 GS Paper 3
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What Happened

  • An analysis highlights growing concerns about fiscal discipline eroding during election cycles, as political parties across states make large unfunded welfare commitments to win votes.
  • India's fiscal deficit for FY 2025-26 (revised estimate) stands at 4.4% of GDP, while the Budget 2026-27 targets 4.3% of GDP, continuing the path of fiscal consolidation.
  • The Union government's total expenditure for 2026-27 is estimated at Rs 53.47 lakh crore, 7.7% higher than the revised estimate for 2025-26, with capital expenditure at Rs 12.2 lakh crore (a 9% increase).
  • The government has transitioned from fiscal deficit targeting to a debt-to-GDP framework, aiming for 50% (+/- 1%) central government debt-to-GDP ratio by March 2031.
  • Experts caution that election-year spending at the state level, particularly through cash transfer schemes, threatens the fiscal consolidation achieved at the central level.

Static Topic Bridges

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

The FRBM Act was enacted to institutionalize fiscal discipline, reduce fiscal deficits, improve macroeconomic management, and ensure long-term fiscal stability. It set quantitative targets for the Centre and required states to adopt similar legislation.

  • Original targets: eliminate revenue deficit by 2008-09 and reduce fiscal deficit to 3% of GDP.
  • The N.K. Singh Committee (2017) recommended replacing the FRBM framework with a debt-to-GDP ratio target of 40% for the Centre and 20% for states by 2023, with a fiscal deficit glide path of 2.5% of GDP.
  • The escape clause allows the government to deviate from fiscal targets in cases of national calamity, war, or unforeseen fiscal emergency (as used during COVID-19, when fiscal deficit reached 9.3% of GDP in FY 2020-21).
  • States adopted corresponding Fiscal Responsibility Legislations (FRLs), which are critical since states account for roughly half of the general government deficit.
  • The 15th Finance Commission linked additional state borrowing space to reform performance, creating incentives for fiscal discipline.
  • By 2026-27, the Centre aims for a fiscal deficit of 4.3% of GDP, on a path toward the 3% FRBM target.

Connection to this news: While the central government has maintained a credible fiscal consolidation path (from 9.3% deficit in FY21 to 4.3% target in FY27), the analysis warns that state-level fiscal discipline is weakening, particularly during election years when FRL commitments are subordinated to electoral promises.

Model Code of Conduct and Election-Period Governance

The Model Code of Conduct (MCC) is a set of guidelines issued by the Election Commission of India (ECI) for the conduct of political parties and candidates during elections. It comes into force from the announcement of the election schedule and remains operative until the results are declared.

  • The MCC originated during the 1960 Kerala Assembly elections and was first circulated nationally during the 1962 Lok Sabha elections.
  • Key MCC provisions include: (a) prohibition on announcing new schemes or projects that could influence voters after election announcement; (b) separation of official work from campaigning; (c) prohibition on using public funds for party propaganda; (d) restrictions on ministerial authority during the election period.
  • The MCC is not legally enforceable through statute but derives its authority from the ECI's powers under Article 324 of the Constitution. The Supreme Court has upheld ECI's authority to enforce it.
  • The ECI has repeatedly flagged concerns about parties making extravagant promises in their manifestos that are not backed by fiscal analysis.
  • The MCC does not cover promises made in party manifestos before the election is announced, creating a loophole where parties announce schemes months before the formal election announcement.

Connection to this news: The timing of welfare scheme announcements before the formal election announcement (and thus before MCC comes into effect) represents a structural gap in India's electoral governance framework, allowing parties to make large fiscal commitments without MCC scrutiny.

State Finances and Centre-State Fiscal Relations

India's federal fiscal architecture distributes revenue-raising powers and expenditure responsibilities between the Centre and states, with the Finance Commission serving as the constitutional mechanism for vertical and horizontal devolution of resources.

  • The 15th Finance Commission (2021-26, chaired by N.K. Singh) recommended 41% of the divisible pool of central taxes be devolved to states, marginally reduced from the 14th FC's 42%.
  • States' aggregate fiscal deficit averaged 3.1% of GDP during 2019-2024, with several states consistently exceeding the 3% FRBM target.
  • State revenue expenditure (including salaries, pensions, interest, and subsidies) has grown faster than revenue receipts in many states, creating a structural imbalance.
  • The RBI's annual report on State Finances has repeatedly warned about the rising debt burden of states, with aggregate state debt reaching approximately 31% of GDP in FY 2024-25.
  • Article 293(3) requires states to obtain Centre's consent for borrowing if they have outstanding loans from the Centre, giving the Centre leverage over state fiscal behavior.

Connection to this news: The tension between competitive populism at the state level and the need for fiscal consolidation at the general government level underscores the importance of strengthening state-level FRLs and linking borrowing permissions to credible fiscal outcomes.

Key Facts & Data

  • Union fiscal deficit: 4.4% of GDP (FY 2025-26 RE); 4.3% target (FY 2026-27 BE).
  • COVID-era peak deficit: 9.3% of GDP (FY 2020-21).
  • Union expenditure (FY 2026-27 BE): Rs 53.47 lakh crore (7.7% increase over FY 2025-26 RE).
  • Capital expenditure (FY 2026-27 BE): Rs 12.2 lakh crore (9% increase).
  • Debt-to-GDP target: 50% (+/- 1%) for central government by March 2031.
  • States' aggregate fiscal deficit: averaged 3.1% of GDP (2019-2024).
  • Aggregate state debt: approximately 31% of GDP (FY 2024-25).
  • 15th Finance Commission devolution: 41% of divisible pool to states.