TOPPER IAS — UPSC Prelims 2026
Economic Survey 2025-26 | Chapter 2 — Fiscal Developments: Anchoring Stability Through Credible Consolidation
PRELIMS
2026
READY
2026
READY
| Year | Fiscal Deficit (% GDP) | Revenue Deficit (% GDP) | Primary Deficit (% GDP) |
|---|---|---|---|
| FY21 | 9.2% | 7.3% | 5.7% |
| FY25 (PA) | 4.8% | 1.7% | 1.3% |
| FY26 (BE) | 4.4% | 1.5% | 0.8% |
The Union Budget FY22 set a medium-term glide path targeting fiscal deficit below 4.5% by FY26 (instead of rigid annual targets). Government fulfilled the FY21 promise to reduce fiscal deficit by more than half in 5 years.
| Component | FY22 | FY24 | FY25 RE | FY26 BE |
|---|---|---|---|---|
| Gross Tax Revenue | 27.09 | 34.66 | 38.53 | 42.70 |
| Corporate Tax | 7.12 | 9.11 | 9.80 | 10.82 |
| Personal Income Tax | 6.69 | 10.07 | 11.99 | 13.57 |
| Securities Transaction Tax | 0.23 | 0.34 | 0.55 | 0.78 |
NUDGE = Non-Intrusive Usage of Data to Guide and Enable. Adopted by Income Tax Department. Uses data analytics to identify non-compliance and nudge taxpayers voluntarily — without audits/litigation.
| Campaign | Outcome |
|---|---|
| Foreign Asset Campaign | ~25,000 taxpayers revised returns; foreign assets declared: ₹29,000 crore+; foreign income: ₹1,000 crore+ |
| Section 80GGC deduction nudge | 91,000+ filed updated returns; excessive deductions reduced by ₹2,050 crore; extra tax: ₹680 crore |
| HRA (House Rent Allowance) | Incorrect claims corrected; additional tax: ₹119 crore |
| TDS third-party reporting | 8,500+ deductors revised; 1.08 crore deductees added; extra TDS: ₹4,825 crore |
The 56th GST Council meeting introduced a two-rate structure: Standard Rate = 18%, Merit Rate = 5%, Sin/Demerit Rate = 40%. This is the 3rd leg of tax reform tripod (after corporate tax cuts 2019 and personal income tax reform April 2025).
| Category | Old Rate | New Rate | Key Items |
|---|---|---|---|
| Agriculture | 12% | 5% | Tractors, agri machinery, fertiliser inputs (sulphuric acid, nitric acid, ammonia) |
| Auto & Parts | 28% | 18% | Small cars, motorcycles ≤350cc, 3-wheelers, buses, trucks, ambulances; uniform 18% on all auto parts |
| Electronics | 28% | 18% | ACs, TVs (>32"), dishwashers, monitors, projectors |
| Textiles | 18% | 5% | Man-made fibres, man-made yarn (12%→5%), handicrafts, marble, intermediate leather |
| Everyday Essentials | 12–18% | 5% | Hair oil, soaps, shampoo, toothpaste, bicycles, kitchenware |
| Food Items | 0% | 0% | UHT milk, all Indian breads, packaged & labelled paneer — Zero GST |
| Packaged Foods | 12–18% | 5% | Namkeens, instant noodles, chocolates, coffee, butter, ghee, preserved meat |
| Medicines | 12% | 5% | All drugs & medicines; Zero on select lifesaving drugs; 5% on medical devices & equipment |
| Hotels | 12% | 5% | Hotel accommodation ≤₹7,500/unit/day |
| Personal Services | 18% | 5% | Gyms, salons, barbers, yoga centres |
| Insurance | 18% | Exempt | GST exemption on individual life & health insurance, reinsurance of these |
| Renewables | 12% | 5% | Solar, wind devices; biodegradable bags (18%→5%) |
| Luxury/Sin goods | 28%+cess | 40% | Motorcycles >350cc, luxury cars (but cess on luxury cars removed) |
Exam Tip — GST 2.0 Timeline: GST introduced 2017 → Corporate tax cut 2019 → Personal Income Tax reform April 2025 → GST 2.0 on 22 September 2025. This is the "tax reform tripod." The GST correlation with nominal GDP = 0.92 (very high).
| Component | FY22 | FY25 PA | FY26 BE |
|---|---|---|---|
| Dividends and Profits | ₹1.61 lakh cr | ₹3.08 lakh cr | ₹3.25 lakh cr |
| Total Non-Tax Revenue | ₹3.65 lakh cr | ₹5.38 lakh cr | ₹5.83 lakh cr |
RBI surplus transfer for FY25: ₹2.68 lakh crore (approved in FY26) — up 27% from ₹2.19 lakh crore paid in previous year. Non-tax revenues Apr–Nov 2025: +20.9% YoY, reaching 88.6% of BE.
| Metric | FY20 | FY25 | Change |
|---|---|---|---|
| No. of Operating CPSEs | 256 | 291 | +35 |
| Gross Turnover/CPSE | — | — | +32% |
| Net Profit/CPSE | — | — | +174% |
| Dividend/CPSE | — | — | +69% |
| Sector | FY24 (₹L cr) | FY25 PA (₹L cr) | YoY Growth |
|---|---|---|---|
| Road Transport & Highways | 2.64 | 2.85 | 8.1% |
| Railways | 2.43 | 2.52 | 3.9% |
| Defence | 1.65 | 1.71 | 3.7% |
| Transfer to States | 1.23 | 1.66 | 34.9% |
| Telecommunications | 0.59 | 0.74 | 24.4% |
| Housing & Urban Affairs | 0.26 | 0.32 | 19.6% |
| Total | 9.49 | 10.52 | 10.8% |
Railways: Freight earnings = 68% of gross traffic receipts (FY23), declining to 65% (FY25), budgeted 62% (FY26) — freight cross-subsidises passengers. Passenger fares rationalised on: 1 Jan 2020, 1 July 2025, 26 December 2025.
Electricity Act (Amendment) Bill 2025: Cross-subsidies paid by manufacturing, railways, metro must be fully eliminated within 5 years. Mandates cost-reflective tariffs. Also enables direct power procurement by industrial users.
| Transfer Type | FY22 (₹L cr) | FY26 BE (₹L cr) |
|---|---|---|
| States' share in Central taxes (Tax Devolution) | 9.0 | 14.2 |
| Centrally Sponsored Schemes (CSS) | 3.4 | 5.3 |
| Finance Commission Grants | 2.1 | 1.3 |
| Other Grants/Loans | 2.6 | 4.8 |
Total transfers rose from 5.7% → 6.9% of GDP (FY20→FY26). In absolute terms: ₹11.5L cr → ₹25.6L cr.
| Category | Recommended FY26 | Released (Dec 2025) |
|---|---|---|
| Post-Devolution Revenue Deficit Grants | ₹13,705 crore | ₹10,279 crore |
| Local Body Grants (Rural & Urban) | ₹76,821 crore | ₹25,884 crore |
| Health Sector Grants | ₹15,272 crore | ₹12,968 crore |
| Disaster Management Grants | ₹42,029 crore | ₹28,666 crore |
| Total | ₹1,47,827 crore | — |
| Year | Budget Estimates | Actuals |
|---|---|---|
| FY21 | — | ₹11,830 crore |
| FY22 | ₹10,000 cr | ₹14,186 crore |
| FY23 | ₹1,00,000 cr | ₹81,196 crore |
| FY24 | ₹1,30,000 cr | ₹1,09,554 crore |
| FY25 | ₹1,50,000 cr | ₹1,49,484 crore |
| FY26 | ₹1,50,000 cr | ₹83,595 cr (till 04.01.26) |
Impact: State capex (incl. SASCI): 2.17% → 2.37% GDP (FY22→FY25). State capex excluding SASCI: 2.11% → 1.92% GDP — showing SASCI is critical. Lower-income states rely more on SASCI.
Fiscal Deficit = Total Expenditure – Total Non-Debt Receipts. It tells you how much the govt borrowed. Revenue Deficit = Revenue Exp – Revenue Receipts. When govt borrows for day-to-day spending (bad quality). Primary Deficit = Fiscal Deficit – Interest Payments. Zero primary deficit means you're only borrowing to service past debt — current spending is self-funded.
Measures how fast tax revenues grow relative to GDP growth. Formula: Tax Buoyancy = % change in tax revenue ÷ % change in GDP. Buoyancy > 1 = taxes growing faster than GDP (good — formalisation, better compliance). India's non-corporate tax buoyancy: 1.8 (FY23-FY25) — very high, means the tax base is deepening.
= Capital Expenditure + Grants-in-Aid for capital asset creation. It's a broader measure than plain capex. Why does it matter? Grants given to states/ULBs for building schools, water connections, roads also create productive assets even though they appear as grants (revenue) in the Centre's books. Effective capex FY25: 4% of GDP.
When GST rate on inputs is higher than on the final output — so manufacturers pay more tax to buy raw materials than they collect on selling finished goods. This creates a refund situation and causes working capital stress. GST 2.0 corrects IDS in textiles (inputs now taxed lower) and fertilisers. Automated ITC refunds address residual IDS.
Based on behavioural economics: rather than forcing compliance through audits/penalties, the IT Department sends targeted data-driven prompts — "we notice you haven't declared these foreign assets" — giving taxpayers a chance to voluntarily correct. This reduces litigation, costs, and friction for both sides. Very effective: ₹29,000 crore+ of foreign assets declared via one campaign alone.
Instead of releasing bulk funds upfront (which sat idle at state agencies), the Centre now releases money only when expenditure actually occurs — a debit-pull model. Benefits: eliminates idle balances (₹1.67L cr → ₹0.4L cr), prevents fund diversion, saves interest costs (govt borrowing rate ~7%). SNA-SPARSH for CSS, TSA for Central Sector schemes.
The risk that when old government bonds mature, the govt cannot refinance (roll over) at reasonable costs — especially if markets are stressed. India manages this by issuing longer-maturity bonds (WAM ~19 years), so only 27% of debt matures in 5 years. Switch/buyback operations help extend maturity profile proactively.
When one group of customers pays above cost so another group can pay below cost. In Railways: freight pays above cost to subsidise passengers. In Power: industries pay above ACoS (average cost of supply) to subsidise domestic/agricultural users. Problem: distorts prices, reduces competitiveness, discourages the subsidising group. Solution: cost-reflective tariffs.
FRBM (2003): set a 3% fiscal deficit target for the Centre — rigid, annual, seldom achieved (met only ONCE). New framework: Debt-to-GDP ratio of 50±1% by FY31 — more meaningful (captures cumulative effect) and more flexible (allows short-term adjustment without missing the broader goal). Survey argues: don't return to 3% FRBM until global uncertainty eases and debt comes closer to target.
Unconditional Cash Transfers (UCTs): money given without any conditions — e.g., ₹1,000/month to all women irrespective of behaviour. Conditional Cash Transfers (CCTs): money linked to actions — school attendance, health visits (Mexico's Progresa, Brazil's Bolsa Família). Evidence: CCTs deliver better outcomes in education, health. UCTs help short-term consumption but don't enable sustainable poverty exit. India's state UCT spending: ~₹1.7L cr (FY26).
GST 2.0 (effective 22 Sept 2025, 56th GST Council) introduced: Merit Rate = 5%, Standard Rate = 18%, Sin/Demerit Rate = 40% (inclusive of earlier compensation cess). This was the 3rd leg of India's tax reform tripod (after corporate tax 2019 and PIT reform April 2025).
NUDGE is a behavioural economics-based tool that uses data analytics to identify non-compliance and nudges taxpayers to voluntarily correct filings — without audits or litigation. The Foreign Asset Campaign alone led to declaration of ₹29,000 crore+ in foreign assets.
The new fiscal anchor moves away from rigid deficit targets (FRBM's 3% — achieved only once since 2003) to a debt-to-GDP ratio target. India already reduced general govt debt by ~7.1 percentage points since 2020, while sustaining public investment.
GST exemption granted to all individual life and health insurance policies + reinsurance of these policies. Select lifesaving drugs also got Zero GST. Hair oil/shampoo went from 18%→5%. Man-made fibres: 18%→5%. Hotels ≤₹7,500: 12%→5%.
SASCI was launched in October 2020 and provides 50-year interest-free loans (not grants) exclusively for capital expenditure. Total uptake FY21-FY26: ₹4,49,845 crore. State capex excluding SASCI actually declined from 2.11% to 1.92% of GDP — showing SASCI is critical for protecting state investment.
DBT has saved ₹3.48 lakh crore in fiscal leakages over the past decade, while beneficiary coverage expanded ~16-fold (11 crore → 176 crore). Applied across PDS, MGNREGA, PM-KISAN, fertiliser subsidies.
The Survey cites Mexico's Progresa/Oportunidades and Brazil's Bolsa Família as examples of well-designed conditional cash transfers — where cash is linked to school attendance and health clinic visits. Also cited: Philippines' Pantawid Pamilyang Pilipino Program and Opportunity NYC (USA). These contrast with India's unconditional state-level UCTs.
Statements 1 (ACs/TVs 28%→18%), 2 (insurance exempted), 4 (MMF 18%→5%) are all correct. Statement 3 is wrong — luxury cars moved to 40% slab but the cess on luxury cars was REMOVED (not increased). The 40% rate is inclusive of the earlier compensation cess, so overall burden doesn't increase.
RO-PDS uses optimisation algorithms (developed by IIT-Delhi + UN World Food Programme) to define optimal warehouse-to-FPS routes. Completed across 31 States/UTs. Annual savings: ~₹250 crore. Transport distance reduced by up to 50%, CO₂ emissions by up to 35%.
Marketable securities (dated securities + treasury bills) form ~65% of government liabilities. This composition enables effective transmission of domestic macro-financial conditions to borrowing costs. External debt = only ~2.6% of GDP, mostly from multilateral institutions on concessional terms.
TOP 10 HIGH-YIELD FROM CHAPTER 2: (1) GST 2.0 = 22 Sept 2025, three rates: 5/18/40%; (2) Insurance zero GST; (3) NUDGE = ₹29,000 cr foreign assets declared; (4) SASCI = 50-yr interest-free loans, ₹4.49L cr total; (5) DBT savings = ₹3.48L cr; (6) Debt target = 50±1% by FY31; (7) New IT Act = 21 Aug 2025, effective 2026-27; (8) FRBM 3% target achieved only once since 2003; (9) UCT = ₹1.7L cr FY26, lacks sunset clauses; (10) JIT: Idle balances ₹1.67L cr → ₹0.4L cr.