The central government’s fiscal deficit widened year-on-year in the first quarter of 2026-27, driven by higher capital expenditure. However, the pace of the rise in the fiscal deficit suggests that the impact of war in West Asia on the government’s finances has been limited so far.
Economists project the government’s fiscal position to come under pressure going ahead with hostilities reigniting in West Asia in July, after a brief pause in June, and crude oil prices rising sharply. The fiscal deficit could rise above the Budget target of 4.3% of GDP in FY27, but higher-than-budgeted nominal GDP growth and buffers in the form of the Economic Stabilisation Fund should provide some cushion, economists said.
According to Controller General of Accounts (CGA) data, the fiscal deficit was Rs 3.1 lakh crore during April-June, up 10% on year. This accounted for 18.2% of the Budget Estimate (BE) for FY27. In the corresponding period a year ago, the fiscal deficit was 17.9% of the respective Budget target.
“The first quarter picture of central government accounts shows that the balances are under control,” said Madan Sabnavis, chief economist, Bank of Baroda. “This is significant because Q1 was the time when there was major disruption on account of the war where there was additional pressure on the fertiliser subsidy front as well as tax revenue when the excise duty was lowered on fuel products.”
The wider fiscal deficit was driven by higher capital expenditure, which rose 24% on year to Rs 3.4 lakh crore in the June quarter. Capital expenditure so far has outpaced budgeted growth of 11.5% for FY27. The April-June quarter capex made up 27.8% of the Budget target, higher than 24.5% achieved for the respective target a year ago.
The high pace of capex in April-June is expected to “augur favourably for GDP growth in the quarter,” ICRA Chief Economist Aditi Nayar said.
Revenue expenditure grew 7.4% in April-June to Rs 10.2 lakh crore, despite the Centre’s total subsidy bill rising 37% in the quarter. The government’s total expenditure was up 11% year-on-year in April-June at Rs 13.6 lakh crore.
RECEIPTS
The Centre’s net tax revenue rose 17.8% year-on-year in April-June at Rs 6.4 lakh crore, even as gross tax revenue growth was much slower at 3.7%. Net tax revenue growth outpaced gross tax revenue because of lower transfer to states.
Gross tax revenue growth was subdued because of a 22% contraction in excise duty collections in April-June, which reflected the impact of the duty cuts on petrol and diesel.
Goods and services tax collections were also slow, mainly because of Integrated GST outflows during the quarter. Customs duty inflows surged 36% in April-June, thanks to the import duty hikes on gold and silver.
Among direct taxes, income taxes rose just 6.8% in the June quarter. Corporate taxes, on the other hand, jumped 20% during the quarter.
“The impact of higher oil prices is not yet fully visible on Union government finances. Had government not reduced excise duty on petrol and diesel, the tax collections would have been higher,” said Devendra Kumar Pant, chief economist, India Ratings and Research.
Non-tax receipts were up just 1.2% in April-June, while non-debt capital receipts grew 25% year-on-year, driven by higher disinvestment and asset monetisation. The government has met 31% of the miscellaneous capital receipts target of Rs 80,000 crore for FY27 in April-June.
The success of achieving the FY27 fiscal deficit target would largely hinges on disinvestment and asset monetisation receipts, Pant said.
“Depending on how the war pans out and crude oil plays, it does look like that the expenditure on revenue account could be higher; and in case capex is maintained, there can be pressure on the fiscal deficit ratio. In the stressed case there can be a slippage of 0.3-0.4% of GDP. Higher growth in GDP will provide statistical cushion, however,” said Bank of Baroda’s Sabnavis.