FISCAL DEFICIT SPIKES ON FLAT TAX REVENUES STORY

FISCAL DEFICIT SPIKES ON FLAT TAX REVENUES STORY

The fiscal deficit situation appears to be have sharply deteriorated in the month of August, largely on account of a surge in the subsidy bill. Net tax revenues have been flat, partially because the advance tax revenues were booked entirely in June. Fiscal deficit has come in at 41.9% of full year target as of the end of August; sharply higher than the 26.8% recorded at the end of July. That makes the 4.3% fiscal deficit goal for FY27 fairly challenging.

The month of August saw disappointment on the net tax revenue front. However, non-debt capital receipts nearly doubled, largely on account of the LIC offer for sale (OFS) in August 2026. Fiscal deficit surged by ₹2.55 trillion in August; although September will see some relief due to the advance tax flows. As of end-August, nearly 46% of the subsidy budget is used up, compared to just 39% last year. Fertilizer subsidies are the pain point.

FISCAL DEFICIT NUMBERS FOR 5 MONTHS OF FY27

Here are government receipts, expenditures, and fiscal deficit for 5 months of FY27 ending August 2026. The table also shows the percentage of target reached for each item.

Data Source: Controller General of Accounts (# - 5 months data)

With net tax revenues struggling, the combined flows from non-tax revenues and non-debt capital receipts are as high as 63% of net tax revenues. Remember, the big income tax refunds for FY25 and FY26 are yet to be paid. We will get the actual picture of net tax revenues only after these refunds are paid out. On the tax front, while STT flows continue to be robust, direct and indirect tax flows have been less than gratifying.

At the end of 5 months, the net tax revenues are just 29.2% of full year target. That raises the possibility of revenues falling well short of target, unless there is a strong back-ending of tax inflows. On the expenditure side, government has been keeping revenue expenditure in check, but there is only a point up to which these can be controlled. The capital spending appears to be becoming the casualty in this entire exercise to check the fiscal deficit.

WHAT WE READ FROM THE AUGUST FISCAL DEFICIT UPDATE FOR FY27

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

Interestingly, the government has reduced the FY27 borrowing target by almost ₹1.20 trillion. One reason could be that the RBI is likely to implement 2 rate hikes of 25 bps each in October and December monetary policies. With rates going higher, the government may want to avoid a higher interest burden on its debt. But that still does not explain how the fiscal deficit gap will be funded, if not via borrowings?

Non-tax flows like RBI dividends, disinvestment proceeds, and asset monetization have been impressive in FY27. However, there are some key questions. With $133 billion being collected via FCNR(B) deposits, the government has a major hedging liability. Also, the disinvestments are likely to taper from here on. The government will have to go back to relying more on net tax revenues from the coming year.

While Q1GDP growth has been impressive at 7.8%, a lot of that has to do with the base effect. The inflation advantage will be much lower in Q2 and Q3, so real GDP growth may come under pressure. With rising geopolitical risk, India is likely to face pressure on the revenue front. This is even as specific items of spending like defence, agriculture, and fertilizer subsidies are likely to remain at elevated levels.

A lot will predicate on the second half of FY27; and the hope is that some of the challenges like high oil prices and weak rupee start to normalize in H2-FY27.

THREE THINGS TO WATCH OUT ON FISCAL DEFICIT FRONT

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

Tax revenues have been moving at the slowest pace in recent years. Too much reliance on STT and tepid flows from direct and indirect taxes is not a good sign.

The government is likely to impose a lot of belt-tightening measures in the second half to avoid letting the fiscal deficit go out of control. This could include sharp cuts in revenue and capital spending. Reduced borrowing target points to that.

According to an ICRA estimate, the actual fiscal deficit for FY27 could overshoot by around ₹1,40,000 crore to the ₹18.40 trillion levels. If nominal GDP growth also falters, then the fiscal deficit ratio could overshoot by a bigger margin.

A mix of Middle East uncertainty, oil prices, and a weak rupee is putting pressure on government finances. India needs to brace for a much tougher second half of FY27.