Even amid slowing nominal GDP growth and ambitious fiscal consolidation plan, economists broadly agree that the Union government can still meet its headline fiscal deficit goal of 4.4% of GDP for FY26, compared with 4.8% in FY25. The management will, however, be anchored by expenditure discipline.
While absolute fiscal numbers may hold, expenditure discipline will face pressure, requiring deft management through the year, the economists feel.
A key concern is nominal GDP growth. The Union Budget assumed a 10.1% expansion in FY26, while current estimates cluster closer to 8–8.5%. Bank of Baroda chief economist Madan Sabnavis cautions that lower nominal growth could stress fiscal ratios even if the absolute deficit doesn’t rise.
India Ratings chief economist Devendra Pant and ICRA chief economist Aditi Nayar, however, allayed the worry by highlighting the upward revision of FY25 GDP. Because the base has been revised higher, even a slower growth rate in FY26 could still deliver a nominal GDP level equal to or higher than Rs 356.98 lakh crore assumed in the Budget, they noted. This arithmetic significantly reduces the risk of a mechanical fiscal slippage, they reckon.
On the expenditure side, an additional Rs 65,000 crore is required for fertiliser subsidies and for food during the year.
As in previous years, the extra expenditure on subsidies is often required to deal with global commodity prices reflecting geopolitical dynamics. So, the Centre is estimated to incur about Rs 28,000 crore in additional fertiliser subsidy over the FY26 budget estimate (BE) of Rs 1.67 lakh crore and around Rs 22,000 crore more for food subsidy over the BE of Rs 2.03 lakh crore. Additionally, the Centre will provide around Rs 15,000 crore to state-run oil marketing companies (OMCs) in FY26 to compensate them for losses in domestic cooking gas for not passing on the rise in costs to consumers.
Revenue Gap
The bigger challenge lies on the revenue side. Going by the gross tax revenue receipts (GTR) in April-October, analysts expect the GTR shortfall could be up to Rs 1.2-1.5 lakh crore in FY26, largely on account of income tax and goods and services tax (GST) reductions.
All three economists flag risks to tax collections, particularly after GST rationalisation. Sabnavis noted two clear pressures: slower GDP growth hurting direct taxes, and GST rate cuts that were expected to reduce revenues by nearly Rs 48,000 crore. Pant echoed this view, calling the tax target “a bit difficult”, while Nayar quantified the challenge more starkly. According to ICRA estimates, gross tax revenues would need to grow over 22% year-on-year in the final five months of FY26 to meet the budgeted Rs 42.7 lakh crore—an asking rate she considers unrealistic. As a result, she expects a shortfall of Rs 1.2–1.5 lakh crore. Post devolution, the net tax revenue shortfall for the Centre could be in the region of Rs 69,000-87,000 crore in FY26.
Yet, the consensus is that the government has buffers. Non-tax revenues, especially higher-than-budgeted dividends—most notably from the RBI—are expected to a large extent offset tax underperformance. Sabnavis underlined that strong dividend flows have already provided room to accommodate GST reforms, while Pant and Nayar both see non-tax revenue and non-debt capital receipts playing a stabilising role. However, these are largely one-off or cyclical in nature, underscoring that FY26 fiscal consolidation may rely more on expenditure control than on durable revenue gains.
Expenditure Management
On expenditure, recent history offers reassurance. Nayar pointed out that over the past 7–8 years, the Centre has typically achieved savings of over Rs 1 lakh crore annually through compression across ministries. A similar scenario may play out in FY2026, given that the GoI’s non-interest non-subsidy revenue expenditure needs to expand by a steep ~28% in the last five months of the fiscal. “A Rs. 1.5 lakh crore expenditure cut on this account would peg the growth in this head at ~12%, which would still be quite high. This would offset higher expenditure requirements from some heads such as fertiliser subsidy, as well as the shortfall on the net tax revenue front,” Nayar said.
Sabnavis added that both revenue and capital spending can be pruned at the margin, depending on priorities. Conditional transfers to states, which depend on project initiation, could also yield savings if states lag in execution.
Capital expenditure remains a relatively bright spot with the potential of fully achieving the target of Rs 11.2 lakh crore. Sabnavis expects nearly 90% of the Centre’s capex to be realised, while Pant is confident that the FY26 capex target will be met. Nayar highlighted that the Centre has already front-loaded spending, achieving over half (55%) of the annual capex target by October. While this implies some moderation in the second half, she expects overall capex to slightly exceed budgeted levels, supported by savings on the revenue side.
States’ performance, however, may be uneven. Sabnavis warned that with several states below the 50% capex utilisation mark by October, completing projects in the final quarter could prove challenging, leading to variation in outcomes.
Capital expenditure by state governments likely grew 10% year-on-year in the first seven months of the current financial year, but revenue expenditure growth was a modest 4% during the period. States are likely in aggregate to retain their aggregate fiscal deficit below 3% of GDP in FY26.
