The Centre’s fiscal deficit widened to Rs 5.98 lakh crore or 38.1% of the annual target in the first five months of 2025-26, compared with 27% of the relevant target in the year-ago period, as net tax revenues continued to contract and capex accelerated.
In April-August 2025, net tax revenues contracted by 7.3% to 8.1 lakh crore as both direct and indirect taxes underperformed. Non-tax revenues surged by 31.7% on year following the receipt of the higher-than-budgeted dividend from the Reserve Bank of India.
What do analysts say?
Analysts said there is still no threat to the Centre’s plan to bring down to 4.4% of GDP in FY26 due to robust non-tax receipts, which will likely bridge any shortfall in tax revenues, due to income tax cuts and goods and services tax (GST) rate cuts.
Gross tax revenues expanded by just 1% on year during the five months of FY26, amid a 2% contraction in income tax collections owing to the extension of the deadline to file taxes as well as an adverse base, and subdued 2% growth in corporate tax collections. Besides, the growth in indirect tax collections also remained lacklustre, at just 3.3%, amid a contraction in customs duties and a mid-single digit growth in GST and excise duty collections.
“These trends suggest some undershooting in the FY2026 BE for gross tax revenues, particularly on the direct taxes side, which is also likely to weigh on the devolution to the state governments in H2FY26. Besides, the GST numbers would also need to be closely monitored to assess the impact of the rate rationalisation on collections,” Icra chief economist Aditi Nayar said.
The Centre’s budgetary capex has been at 38.5% of the budgeted amount against 27.1% last year. This has kept economic momentum up. The expenditure for both railways and roads was higher at 52% and 43% of the annual target, respectively, relative to last year, which was at 45% and 39% respectively. This has kept the expenditure ticking.
What did Madan Sabnavis say?
“It does look like the overall fiscal deficit target will be retained as is, also borne out from the borrowing calendar for the second half of the year,” said Bank of Baroda chief economist Madan Sabnavis.
Interestingly, the Centre’s non-interest revenue expenditure has contracted by 3.2% during the five months of FY26, which implies that this needs to expand by 14% during the remaining seven months of the fiscal to meet the FY26 budget estimate. If a double-tranche of tax devolution is shared with the states in October 2025 amidst the festive season, it would further signal confidence in meeting the overall revenue target, notwithstanding some potential small miss on the tax collections, Nayar added.