FISCAL DEFICIT FOR FY27 SPIKES AS INFLOWS TAPER

FISCAL DEFICIT FOR FY27 SPIKES AS INFLOWS TAPER

The last two months saw aggressive inflows from the RBI dividend in May and the advance tax collections in June. In comparison, the July inflows were relatively subdued, although the inflows from divestment of LIC stake did give a boost to the government inflows in the month of July. Fiscal deficit has come in at 26.8% of full year target as of the end of July. Unless there are negative surprises, the 4.3% fiscal deficit target looks perfectly achievable.

As of July 2026, the non-tax inflows are around 50% of the tax inflows. These non-tax inflows have been largely driven by the record RBI dividend and the disinvestment proceeds, principally from the LIC stake sale. The GDP growth has been robust for Q1FY27 at 7.8%, and while inflation also remains high, the RBI may still wait on rate hikes till there is greater clarity on the situation in the Middle East.

FISCAL DEFICIT UPDATE FOR FY27

Here are government receipts, expenditures, and fiscal deficit for 3 months of FY27 ending July 2027. The table also shows the percentage of target reached for each item.

Data Source: Controller General of Accounts (# - 4 months data) {Deficits in brackets are surpluses}

There are some interesting insights that emerge from the above data. For the first time we have a situation wherein, after 4 months of the fiscal year, non-tax revenues are nearly 50% of tax revenues. Clearly, RBI dividends and disinvestment proceeds have played a much bigger part this year, especially the mega OFS to sell the 6% stake in LIC of India.

On the expenditure side, there continues to be an effort to underplay revenue spending and focus more on capital spending. A large chunk of that has gone towards defence spending, but the good news is that such spending is value accretive for the economy. The latest fiscal deficit numbers must be seen in the light of the Q1FY27 GDP growth of 7.8% announced by MOSPI. The Gulf crisis has had limited impact on growth and on fiscal deficit overall.

WHAT WE READ FROM THE FISCAL DEFICIT UPDATE FOR FY27

Here are key takeaways from the updated fiscal deficit story for FY27.

Will the government be able to rein in the full year fiscal deficit at 4.3% of GDP? That look very likely with GDP growing at a robust pace of 7.8% in the first quarter and likely to grow at between 7.3% and 7.5% for the full year. More importantly, the nominal GDP growth in Q1FY27 is back above double-digits; and the real GDP growth has been robust despite a substantially higher impact of inflation in the form of GDP deflator.

On the non-tax revenue front, the RBI dividends may be closer to peak levels and the RBI has many contingent liability pressures in the coming years. The RBI has raised close to $90 billion through FCNR(B) deposits where the hedging costs are guaranteed by the RBI. Hence RBI dividends may be lower in the coming years. However, we could see more from disinvestment revenues if the market buoyancy persists.

For FY27, the tax revenues are almost flat, but the bigger concern could be on the net taxes (net of refunds). This year and last year, the government has been going slow on disbursing refunds, but the pressure is building up. There is still a substantial backlog of income tax refunds of FY25 and that will have to be closed before December this year. One can expect more pressure on net tax revenues in the coming years.

At the end of the first quarter of FY27, there are risks that we need to be conscious of.

A WORD OF CAUTION FOR FY27

There are some key concerns that the government will have to look into.

The situation in the Middle East shows no signs of abating, and it is now a full 6 months since the war in the Middle East has constrained supply lines.

Inflation remains a concern. Especially, rural inflation has been sharply higher than urban inflation, which could impact rural consumption and overall growth.

The subsidy bill remains a major X-factor. Compared to the end of July in FY26, the subsidy bill this year is already 35% higher and that could make a mess of the overall fiscal deficit numbers for the full year.

For now, the government has the comfort of having sustained GDP growth without fanning too much of fiscal deficit. That challenge is to maintain that edge!