New Delhi, June 16 -- The Centre is likely to narrow its fiscal deficit to 4.2-4.3% of gross domestic product (GDP) in 2025-26, better than its target of 4.4%, driven by higher-than-anticipated dividends from state-run enterprises, banks and the Reserve Bank of India (RBI). A narrow gap in revenue and expenditure will provide the central government with added fiscal space to maintain capital spending to keep the growth engine humming, two people aware of the development told Mint. While the 2025-26 budget pegs the fiscal deficit at 4.4% of GDP, the actual figure is likely to come in lower, much like in 2024-25, said the first official cited above on the condition of anonymity. "This reflects the government's commitment to fiscal discipline even as it balances growth imperatives," the person said. "Stronger revenue flows will allow room to outperform targets without compromising on capital expenditure," the person added. The Centre adopted a fiscal consolidation road map in 2021-22 to reduce the fiscal deficit to below 4.5% of GDP by 2025-26. India's fiscal deficit stood at 4.8% for 2024-25. A higher fiscal deficit raises debt and debt servicing, which strains the economy and risks devaluing the currency and impacting private investments. A ministry of finance spokesperson didn't respond to emailed queries. In its highest-ever dividend payout, the RBI will transfer Rs.2.7 lakh crore in surplus to the Centre for 2025-26, which is even higher than the latest budget's estimates of Rs.2.56 lakh crore in dividends from the central bank and state-run banks combined.Announced on 23 May, the unprecedented transfer was driven by robust dollar sales, foreign exchange gains, and a steady rise in interest income. "The scale of the latest surplus transfer is unprecedented and will play a pivotal role in shaping the fiscal math for 2025-26," the second person cited above said requesting anonymity. "Together with robust PSU dividends, it reflects a broader strategy to optimize public sector balance sheets and unlock value for the exchequer," the person added. The Centre expected to earn dividends of Rs.2.34 lakh crore, including the RBI's Rs.2.1 lakh crore, in 2024-25, according to the latest revised estimates. The Union government is expected to collect Rs.20,000-25,000 crore in dividends from PSU banks for 2024-25, buoyed by record profits and sustained growth, Mint reported on 27 May. The upbeat projections follow a record Rs.1.78 lakh crore in combined net profit posted by all 12 public sector banks in 2024-25, up 26% from Rs.1.41 lakh crore a year ago. State-run banks paid Rs.18,000 crore in dividends in 2023-24 and Rs.13,804 crore in 2022-23. Meanwhile, dividend payments from public sector undertakings (PSUs) are expected to top Rs.80,000 crore for 2025-26, Mint reported on 28 April, underscoring the government's push to extract higher returns from state-owned companies....