Fiscal deficit hits 62% of full-year target as capex surges

The Government of India's fiscal deficit widened to Rs 9.8 trillion, or 62 per cent of the year's target, during April-November, amid a 28 per cent surge in capital expenditure, even as the revenue deficit remained in line with the year-ago levels.

While net tax revenues contracted by 3.4 percent during this period, non-tax revenues expanded by 20.8 percent, and revenue expenditure rose by a modest 1.8 percent, keeping the revenue deficit in check.

The GoI's gross tax revenues declined by 3 per cent in November; overall, gross tax revenues rose by just 3.3 per cent during April-November. While the performance of direct taxes improved, that of indirect taxes remains subdued post the GST rationalisation. Within indirect taxes, customs duties contracted by 7.3 per cent while CGST and excise collections rose by 5-9 per cent. Interestingly, IGST settlement between the Centre and the states over the recent months appears to have dampened the gross tax revenues of the GoI so far. ICRA now anticipates a shortfall of Rs1.5 trillion in the GoI's gross tax revenues in the current fiscal relative to the Budget estimate.

The GoI’s capex contracted for the second consecutive month in November, thereby declining by 21 per cent in October-November after having expanded by 31 per cent in Q2. Nevertheless, capex recorded a healthy rise of 28 per cent until now, amounting to 59 per cent of the year’s Budget estimate as against 49 per cent in the year ago period.

Given the upfronting seen in H1, capex needs to contract by 14 per cent during December-March to remain within the Budget estimate. However, the GoI needs to enhance the allocation for capex somewhat, limiting the contraction in the last four months of the fiscal.

The GoI’s non-interest non-subsidy revex has declined by 4.4 per cent during April-November; expenditure under this head needs to expand by a substantial 30 per cent during the last four months of the fiscal to meet the Budget Estimate. This appears unlikely and could lead to sizeable savings, which would offset the shortfall on the receipts side. A Rs1.5 trillion cut in expenditure on this account would still imply a required growth of 11 per cent during the last four months.

The first batch of supplementary demand for grants for FY2026 entailed a modest net cash outgo of Rs414.6 billion, mainly accounting for additional allocations for fertiliser subsidy, compensation to OMCs for under recoveries in domestic LPG, and transfer to J&K. This could be comfortably offset by the expenditure savings on account of the non-interest non-subsidy revenue spending. Overall, analysts expect the GoI’s revex to print lower than the Budget Estimate.

Overall, analysts expect the potential miss on the taxes side to be offset by higher-than-budgeted non tax revenues and sizeable expenditure savings on the revenue spending front.

As a result, experts do not anticipate a fiscal slippage at the current juncture.