With a better assessment of the impact of the West Asia crisis on the economy and lower-than-anticipated subsidy pressures, the Centre is hopeful of containing the fiscal deficit at around the Budget Estimate (BE) of 4.3% of GDP for FY27, despite the revenue loss from the recent cut in petrol and diesel excise duty, sources said.
The government’s confidence stems largely from a sharp moderation in the additional fertiliser subsidy requirement, which had emerged as one of the biggest fiscal risks after the West Asia war broke out 27 days after the Budget for FY27 was presented on February 1. The additional requirement, initially estimated at Rs 2.7 lakh crore over and above the Budget provision of Rs 1.71 lakh crore, subsequently fell to Rs 2.5 lakh crore, then Rs 1.7 lakh crore and is now estimated at less than Rs 70,000 crore as global fertiliser prices have moderated sharply.
“Hopefully, the additional fertiliser requirement would be Rs 30,000-40,000 crore this year,” an official said. The additional requirement will be met partly through the Rs 1 lakh crore Economic Stabilisation Fund (ESF), which was created from unspent balances of the previous year to meet the fiscal impact of the Pay Commission award in FY28.
The ESF has provided the government with a fiscal buffer following the West Asia shock. Importantly, any drawdown from the fund will not add to the FY27 fiscal deficit since the corpus had already been reflected in the FY26 fiscal deficit. The Rs 10,000-crore aviation turbine fuel (ATF) price stabilisation fund created from the ESF corpus also did not result in any drawdown, providing another cushion to the government.
The Centre had originally pegged the FY27 fiscal deficit at 4.3% of GDP. The ratio, however, effectively rose to 4.5% following the introduction of the new GDP series, which reduced the size of the economy. Officials are nevertheless hopeful of keeping the deficit close to the original Budget target by using available fiscal buffers and containing expenditure.
On the revenue side, the Rs 10-per-litre cut in excise duty on petrol and diesel is estimated to cost the exchequer Rs 1-1.4 lakh crore in FY27, although this could be partly offset by higher receipts from export levies on petrol, diesel and ATF. The government is also looking to strengthen non-tax revenues through disinvestment and asset monetisation.
Against the Budget target of Rs 80,000 crore from disinvestment and asset monetisation, actual receipts could exceed Rs 1 lakh crore, helped by an acceleration in disinvestment and likely proceeds from the strategic sale of IDBI Bank. This would provide some offset to the revenue loss from the fuel duty cut.
On the expenditure side, the government is reappraising centrally sponsored and central sector schemes to contain spending where possible, while protecting capital expenditure. Officials said stricter enforcement of spending norms and just-in-time release of funds directly to implementing agencies could also prevent funds from being parked unnecessarily.
Based on spending trends over the past couple of years and tighter monitoring, the Centre could potentially save up to Rs 2 lakh crore through better expenditure management. These savings could be reprioritised towards additional expenditure requirements without materially weakening the fiscal position.
The government’s ability to keep the deficit around 4.3% will therefore depend on a combination of lower subsidy pressures, ESF support, higher non-tax receipts and tighter expenditure management. While the West Asia crisis has added to fiscal risks, officials believe these buffers should allow the Centre to absorb the shock without compromising its commitment to capital expenditure.