To be fair, the low fiscal deficit at 0.8% of full year target towards the end of May 2025 was rather misleading. The ₹2.69 trillion RBI dividend had been fully accounted for in May. However, in June, the fiscal deficit spiked by nearly ₹2.68 trillion, neutralizing the RBI dividend. For now, the real worry is not about what has happened to fiscal deficit at end of Q1FY26, but what can happen to the fiscal deficit in the next 3 quarters. For now, it does look like a challenge! 

Over the last 4 years, after the impact of the pandemic on fiscal deficit, India has adopted prudence as a policy. In FY25, the fiscal deficit was restricted to just about 4.8% of GDP, while target for FY26 has been set at an aggressive level of 4.4%. While the fiscal prudence is laudable, this year will see pressure on the fiscal deficit from multiple fronts. It will include concerns on the revenue side and also areas that will require a higher level of spending by the center. That is likely to result in a surge in fiscal pressure. It is hard to say what will be the final number, but here is a quick look at the pros and cons on the issue. 

Let us first look at the positives for the fiscal deficit in FY26. The GDP growth is expected to be in the range of 6.0-6.5% for the full year. While the nominal GDP growth would be lower than the FY21 to FY24 period, the influence on the direct and indirect tax collections would still be positive. In fact, STT could surprise on the positive side. The real concern is on the spending side. Revenue expenditure surged in June, especially in defence. India will spend big money on defence procurement due to geopolitical risks. It also has to keep capex growth robust, so that the GDP is not impacted. Above all, US trade tariffs will be an overhang on growth, although there will be some respite from disinvestment of PSUs. 

To be fair, we could most likely see some slippage in fiscal deficit this year. It is not only because the global macros are in a state of flux, but also because the fiscal deficit was set aggressively lower this year. For now, this does look like a one-off year, hence India can let the fiscal deficit slip this year and bring it back under control next year. India does not have to be overly concerned about sovereign ratings, because that is not going to improve unless per capita income picks up and debt tapers. They both are long term ideas. FY26 may see some fiscal slippage, but that is a risk worth taking to buy GDP growth!