Fiscal Deficit: The real problem is the tepid revenue flows

When the RBI cut its H2FY2027 borrowing estimate to ₹7.86 trillion and its full year borrowing by ₹1.20 trillion; there were hopes of lower a fiscal deficit. However, August numbers are quite disconcerting.

What the August fiscal deficit update tells us?

As per the update provided by the Controller General of Accounts (CGA), India’s fiscal deficit as of the end of August 2026 stood at ₹7.10 trillion. That is nearly 41.9% of the full-year fiscal deficit target of ₹16.96 trillion. If you compare with the first 5 months of the previous fiscal year, this year’s ratio is 380 basis points higher. That raises a very pertinent question; will it be possible to rein in the full year fiscal deficit at under 4.3% of GDP. It looks like either there would have to be a sharp control on the fiscal deficit, or a big surge in nominal GDP; and both do not appear realistic at this juncture.

Real challenge is on the net tax collections

August 2026 saw accretion of ₹2.55 trillion to fiscal deficit. FY27 saw record dividend payout by the RBI to the government at ₹2.87 trillion plus robust disinvestment flows. The real challenge was in net tax collections. As of August 2026, net tax collections stood at ₹8.38 trillion against the full-year target of ₹28.67 trillion; just about 29.2% of the full year target is achieved till date. This is largely on account of the sharp cuts in GST rates effected last year to boost sales in the festive season. It supported demand and GDP growth, but it also meant lower tax revenues. The new tax regime (NTR) also led to lower flows on the income tax front. Only STT flows have been robust.

Expect headwinds on non-tax revenues too

Much of the non-tax revenues in FY27 have come in via the RBI dividend to the government and the inflows from disinvestments and asset monetization. Let us talk about RBI dividends first. In the last 3 years, RBI paid out ₹7.66 trillion as dividends. With a massive currency hedge to be provided to FCNR(B) deposits, and a big potential loss on sovereign gold bonds (SGB); RBI is likely to cautious about transfer of surplus for the next couple of years. Also, the disinvestment this year was largely accounted for by the LIC OFS. Over the last few years, the government has substantially monetized many of its income earning assets. DIPAM will prefer to go slow now.

Can the government defend 4.3% fiscal deficit target

There are 3 aspects to India meeting this target: Receipts side, Expenditure side, and nominal GDP. The expenditure side is the most manageable. Both the revenue and capital expenditure are under control and final numbers may even be slightly lower. However, Receipts side is a concern. With net tax receipts at just 29% and the big refunds yet to be paid out; there is a limit to how much disinvestments and asset monetization can offset the shortfall. The bigger question is GDP. The 4.3% fiscal deficit target pre-supposes a 13.9% growth in nominal GDP for FY27 over FY26. That is 350-400 bps higher than the growth of last 3 years. That could be the missing link for fiscal deficit targeting.