The months of June and July 2025 saw a sharp surge in the fiscal deficit. As of the end of May 2025, the fiscal deficit was almost at Nil levels, after the RBI dividend to government was factored in. However, in just the last 2 months, the addition to fiscal deficit has been to the tune of ₹4.55 trillion taking it from near negligible levels to 29.9% in 2 months. That is almost twice the accretion to the fiscal deficit in the months of June and July of 2024. That clearly shows that the fiscal deficit is under some pressure. 

Broadly, there are 3 reasons for this surge in fiscal deficit in last 2 months. The first reason is the higher defense spending that is necessitated due to the geopolitical risks and the changing world equations. Secondly, there has been a visible slowdown in the tax collections. The slowdown is more palpable on the direct taxes front than on indirect taxes. That is also putting pressure on the fisc. Thirdly, the government has upped its capital and revenue spending in the last 2 months to act as an offset to tariff-driven impact on economic growth. Most of these factors are likely to persist.  

In the last few years, India has not only consistently reduced the fiscal deficit as a percentage of the GDP, but it has also bettered on its annual targets. For FY26, the Union Budget had set an aggressive target of fiscal deficit at 4.4% of GDP. With 33% of the full-year fiscal deficit target covered in just the last 2 months, and the tariff crisis only worsening, the fear is that India could overshoot on the fiscal deficit management front. India had set aggressive targets to take the fiscal deficit to 4.4% by the end of FY26 and further to below 4.0% on a long-term basis. That could be a challenge if the spending surges and tax flows slow.

Should India worry about its fiscal deficit overshooting its target? Fiscal prudence is always a worthwhile goal, but then there are extraordinary times that call for extraordinary action points. India is at such a stage now. The 50% tariffs that the US has imposed on India will hit exports to the tune of nearly $50 billion to the US. Apart from the trade deficit impact, the bigger impact will be on the domestic output, growth, jobs and MSME debt. That is what really needs help. In the long-run, domestic markets will save the day, but in the short run, the pain has to be mitigated. That can only be done if government intervenes directly. That has a cost and, it will push up the fiscal deficit to higher levels!