The Centre’s fiscal deficit came in at 36.5% of the annual target in the first six months of 2025-26, compared with 29.4% in the year-ago period, largely due to a surge in capital expenditure while net tax revenues continued to contract.
The Centre’s fiscal deficit in H1FY26 stood at Rs 5.73 lakh crore compared with Rs 4.75 lakh crore in H1FY25. Its budgetary capital expenditure (capex) rose a steep 40% on year in H1FY26, partly helped by a 15% year-on-year fall seen in H1FY25 due to election-related lull. Capex rose by 31% on-year in September 2025. Overall, the capex stood at Rs 5.8 lakh crore or 51.8% of the annual target in H1FY26 as against 39% in the year-ago period. Robust capex by the Centre is seen to have helped boost the Q2FY26 GDP. The economy expanded by a higher-than-anticipated rate of 7.8% in Q1.
With the front-loading of capex, it could contract about 15% in H2FY26 and yet meet the annual target of Rs 11.2 lakh crore.
On the other hand, the Centre’s next tax receipts contracted by 2.8% to 12.29 lakh crore, partly due to the income tax relief given in the Budget and modest growth in indirect tax collections as well as a front-loading of tax devolution to the States. The gross tax revenue during the period grew by 2.8% on year while devolution rose by 16% on year.
Non-tax revenues surged by 30.5% on-year to Rs 4.6 lakh crore in H1FY26, aided by the receipt of the higher-than-budgeted dividend from the Reserve Bank of India. There is no threat to the Centre’s plan to bring down to 4.4% of GDP in FY26, official sources and most analysts feel.
With an asking growth rate of over 21% in H2 FY2026 to meet the FY2026 BE, we are apprehensive that taxes will undershoot the budgeted target, Icra chief economist Aditi Nayar said.“As of now, we expect the typical trend of expenditure savings and higher than budgeted non-tax revenues to be able to absorb any shortfall in tax revenues, and do not foresee a material slippage relative to the Government of India’s FY26 fiscal deficit target of 4.4% of GDP,” Nayar said.
In H1FY26, revenue expenditure growth was a muted 1.5% on year, indicating that it could pick up in the second half of the current financial year.