Capex surge widens deficit, while non-tax revenues cushion fiscal strain

Driven by a 32 per cent surge in Capex, the Government of India’s (GoI) fiscal deficit enhanced to Rs8.3 trillion or nearly 53 per cent of the FY2026 BE during April-October FY2026 from Rs7.5 trillion (nearly 48 per cent of PE) in the year ago period. What is encouraging is that the revenue deficit narrowed to Rs2.4 trillion in April-October FY2026 from Rs3 trillion in April-October FY2025, as revenue expenditure remained flat, and non-tax revenues surged by 22 per cent, offsetting the two per cent contraction in net tax revenues that was led by higher tax devolution to the states.

When it comes to the GoI’s gross tax revenues, it expanded by a robust 14 per cent in October 2025, albeit on a low base; and overall, gross tax revenues rose by a tepid 4.0 per cent YoY during April-October FY2026, amid a 6.9 per cent rise in income tax collections, and a subdued 5.2 per cent growth in corporate tax collections.

One has to keep in mind, at this point, that the rise in indirect tax collections was quite weak at just 2.6 per cent in April-October FY2026, amid a 2.5 per cent contraction in customs duties and a 6-8 per cent growth in CGST and excise duty collections.

The latest ICRA study points out that with the later deadline for personal income tax behind us, the base effect has largely normalised. Given this, experts are of the view that the steep ask of 24 per cent in the remaining months to meet the FY2026 BE appears challenging. Interestingly, economic analysts feel that CGST collections need to rise by close to 18 per cent during the last five months of the fiscal, which suggests a possible miss on this account. Meeting the FY2026 BE requires a steep YoY expansion of 22 per cent in gross tax revenues in November-March FY2026. Given this, ICRA is apprehensive that gross tax revenues will undershoot the budgeted target of Rs42.7 trillion by nearly Rs1.2-1.5 trillion. This would be partly offset by the expected overshooting of nearly Rs0.5 trillion in non-tax revenues, on account of the higher-than-budgeted RBI surplus transfer to the GoI.

Simultaneously, one has to keep in mind that the GoI’s capex contracted by 28 per cent in October 2025, after rising by 31 per cent in Q2 FY2026, possibly on account of the festive holidays. Nevertheless, during April-October FY2026 it expanded by 32 per cent YoY to Rs6.2 trillion, amounting to close to 55 per cent of the FY2026 BE as against approximately 44 per cent in the year ago period. Owing to the upfronting seen in the first half of the fiscal, capex needs to contract by nearly 14 per cent YoY during November-March FY2026 to remain within the FY2026 BE, unless the allocation is enhanced.

The GoI’s non-interest non-subsidy revex has declined by 6.4 per cent during April-October FY2026, which implies that this needs to expand by a high 28 per cent during the last five months of the fiscal to meet the FY2026 BE. This is unlikely and could lead to sizeable savings, which would offset the shortfall on the receipts side.

Overall, economic analysts believe that higher-than-budgeted non-tax revenues would absorb a part of the shortfall on the taxes front. On the expenditure side, while there could be some additional allocation towards the fertiliser subsidy and any supplementary demand for grants, if announced, this would be offset by the expenditure savings of various ministries, in line with the typical trend seen during a fiscal. Consequently, the possibility of a material fiscal slippage at the current juncture can be almost ruled out. And that’s quite significant.