FY27 fiscal deficit target achievable, but slower nominal GDP growth may squeeze fiscal space: report

India’s fiscal position looks comfortable in the opening months of FY27, but the cushion created by economic growth is narrowing. Union Bank Research said slower nominal GDP growth could make it harder for the government to meet its fiscal deficit target of 4.3% of GDP without restraining spending later in the year.

The bank has reduced its FY27 nominal GDP growth estimate to 10-11%, from an earlier 13-15%. That downgrade limits the benefit the government expected from a larger nominal economy when measuring the deficit against GDP. The report said the government may need to compress expenditure in the second half of the financial year.

Between April and July, the fiscal deficit reached 4.55 trillion rupees, or 26.8% of the annual budget estimate. That compared with 4.68 trillion rupees, or 30% of the revised estimate, in the same period a year earlier. The improvement came even as spending increased 12.7% year on year to 17.62 trillion rupees.

Capital expenditure rose nearly 30% to 4.51 trillion rupees, reaching 37% of the full-year target. Government receipts increased 19.3% to 13.07 trillion rupees. Income tax collections grew 24.3%, corporate tax receipts rose 20.8%, customs revenue climbed 38.2% and goods and services tax collections increased 16%.

Subsidies are a growing concern. Total subsidy spending rose 35% to 1.53 trillion rupees, while the urea subsidy increased 58% to 66.058 billion rupees. Union Bank Research said subsidy costs would need close monitoring during the remaining months of FY27. It also highlighted disinvestment receipts as an important source of non-debt capital in the second half of the year. The deficit target remains attainable, the report said, but increasingly depends on continued tax growth and tight spending control.

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This may have an impact on fiscal dynamics as the expected space from higher nominal growth in achieving budgeted deficit of 4.3% of GDP is low now and may require expenditure compression for meeting the targets this year.