The Centre’s fiscal deficit widened 21% year-on-year in the first six months of the current financial year to Rs 5.7 lakh crore as it accelerated capital expenditure amid muted tax revenue growth. The fiscal deficit has now reached 36.5% of the FY26 budget target of Rs 15.7 lakh crore.
The central government’s capital expenditure rose by 40% in the April-September period of FY26 to Rs 5.8 lakh crore compared to Rs 4.1 lakh crore in the same period in the previous year. In September, the capital expenditure showed an increase of 30% to Rs 1.4 lakh crore. Higher capital expenditure is considered good as it goes towards building infrastructure and assets.
The government has, however, managed to keep the revenue expenditure in check with barely 1.5% year-on-year growth in the first six months of the financial year. Revenue expenditure goes towards administration costs, salary and pension payments. A miserly increase in revenue expenditure helped the central government keep its overall expenditure growth at 9%, which is still higher than the budgeted growth of 5%.
The net tax revenue (net of states share in Union government’s tax pool) contracted by 2.5% in the April-September 2025 period even as the gross tax revenue witnessed a 2.8% growth at Rs 18.6 lakh crore. The muted growth in gross tax revenue was largely due to slow growth (1.1%) in corporate tax collection.
Personal income tax collection also witnessed an underwhelming 4.7% growth to Rs 5.9 lakh crore in the first six months of the financial year against the budgeted growth target of 14.4%. The government has overhauled the personal income tax rate slabs exempting those earning up to Rs 12 lakh a year from paying taxes. The increase in indirect tax collections was also a tepid 3.2% during the period, with a 5.2% contraction in customs duties and a 4-8% growth in GST and excise duty collections.
“With an asking growth rate of over 21% in the second half to meet the FY26 budget estimate, we are apprehensive that taxes will undershoot the budgeted target,”says Aditi Nayar, chief economist, ICRA Ltd.
However, she expects the typical trend of expenditure savings and higher than budgeted non-tax revenues to be able to absorb any shortfall in tax revenues, and therefore, does not foresee a material slippage relative to the Centre's FY2026 fiscal deficit target of 4.4% of GDP.
