CHENNAI: India’s fiscal consolidation efforts may face renewed pressure in the next financial year, with the government’s fiscal deficit likely to widen to 4.6 per cent of gross domestic product despite a lower official target of 4.3 per cent expected to be announced in the 2026–27 Union Budget, according to a report by BMI, a unit of Fitch Solutions, released on Thursday.
The report said the divergence between the headline target and the likely outturn would be driven by fresh spending requirements alongside weaker-than-expected tax collections. While the government remains committed to a medium-term path of fiscal discipline, BMI cautioned that emerging economic and social priorities could complicate adherence to stated deficit goals.
On the expenditure side, higher outlays are expected on infrastructure, welfare schemes and defence, as well as potential support measures aimed at sustaining economic growth. With global conditions remaining uncertain and domestic growth facing periodic headwinds, the government may find it necessary to step up spending to support demand and job creation. Such pressures, the report noted, could push actual borrowing needs above budgeted levels.
At the same time, revenue growth may fall short of assumptions built into the budget. Slower expansion in nominal GDP, moderation in corporate profitability and uneven consumption trends could weigh on direct and indirect tax collections. BMI also flagged the possibility that recent tax buoyancy may not be fully sustained, especially if global trade and investment flows remain subdued.
The analysis suggests that while a fiscal deficit target of 4.3 percent would signal continued commitment to consolidation, achieving it could prove challenging without either sharper expenditure restraint or stronger revenue mobilisation. Deviations from targets have been common in recent years, as governments globally have struggled to balance growth support with fiscal prudence in the aftermath of the pandemic and amid geopolitical uncertainties.
BMI’s projection underscores the delicate balancing act facing policymakers ahead of the 2026–27 Budget. Maintaining credibility with investors and rating agencies will require a clear roadmap for deficit reduction, even if short-term slippages occur. The report added that transparent assumptions, realistic revenue forecasts and a credible medium-term fiscal framework would be critical in reassuring markets that any overshoot is temporary rather than structural.
Overall, the outlook points to a fiscal stance that remains expansionary in practice, even as official targets reflect an intent to tighten. How effectively the government navigates this gap will be closely watched by investors, economists and rating agencies, particularly at a time when global financial conditions remain sensitive to signs of fiscal stress.