Risk of a widening fiscal deficit in India as ICRA warns of a possible miss against the FY2027 target

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Fiscal deficit risk FY2027

Highlights

According to ICRA, the fiscal deficit reached 42.1% of the budget estimate in H1 FY2027, compared with 37.7% in H1 FY2026.
Gross tax revenue growth was limited to 6.1% in FY2027, while duty cuts on petrol and diesel and sluggish income tax collections could leave receipts short of target.
Higher fertilizer and fuel subsidy spending and weaker revenues pose a risk of fiscal slippage of around 1.3–1.4 lakh crore rupees (0.3% of GDP) in FY2027.

This article was translated from the original. Read the original version by our correspondent here.

Fiscal trends in the first half

According to ICRA, the fiscal deficit reached 42.1% of the FY2027 budget estimate in H1 FY2027, compared with 37.7% of the FY2026 provisional actuals in H1 FY2026. The increase was mainly associated with a higher revenue deficit, alongside healthy growth of 12.7% in capital expenditure.

The rating agency says gross tax revenue growth was limited to 6.1% in H1 FY2027. The main factors were a contraction in excise duty collections following duty cuts on petrol and diesel, and sluggish personal income tax collections.

The agency's estimates imply high growth rates of around 28% to 38% in these two revenue streams in the second half of FY2027, raising the risk that both will fall short of their targets. However, a strong 16.5% increase in customs collections, supported by healthy import growth, along with disinvestment proceeds, could ease some of the pressure.

Subsidy pressures and the impact on borrowing

With global energy prices remaining elevated, ICRA expects fertilizer and fuel subsidy spending to exceed the budgeted amount. According to the agency, together with lower revenue receipts, this could result in a modest fiscal slippage of around 1.3 lakh crore rupees to 1.4 lakh crore rupees, or 0.3% of GDP, against the FY2027 target.

Some buffers are available, however, including the 1.0 lakh crore rupee Economic Stabilisation Fund. In addition, expenditure savings of 1.6 lakh crore rupees to 1.7 lakh crore rupees in FY2025 and FY2026 suggest that some of the pressure could be absorbed through spending controls.

ICRA also believes that fiscal slippage does not necessarily mean additional market borrowing. Small savings inflows surged 54% in H1 FY2027 and are expected to exceed the FY2027 target, which could ease some of the pressure on the government's financing needs.

Our previous report on the structure of the central government's disinvestment program also described the trend in recent years: a large share of proceeds has come through market-based routes such as ETFs, public offerings and buybacks, while strategic sales have remained limited. The article also noted that, if the IDBI Bank stake deal is completed, disinvestment proceeds for the current year could come close to or exceed the budget estimate, providing some relief on the fiscal front.

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