MUMBAI: With the government shifting its focus to debt consolidation over the medium-term from annual fiscal deficit targets, and factoring in the burden of the 16th Finance Commission recommendations implementation, the budget is likely to go slow on cutting fiscal deficits and may peg at 4.3% of GDP, just 10 bps lower than the projection for the current budget.
According to an analysis by Icra Ratings' chief economist Aditi Nayar and her team, “the fiscal deficit is likely to be capped at 4.3% of GDP in FY27 (if it pegs the nominal GDP growth at 9.8%) which is marginally lower than the budget estimate of 4.4% for FY26 or Rs 15.7 trillion. The agency has pencilled in some headroom to incur a higher-than-budgeted capital expenditure of Rs 11.5 trillion as against the budget estimate of Rs 11.2 trillion.
Accordingly, total expenditure may trail the target by Rs 550 billion, mainly due to the expected shortfall of Rs 1.3 trillion in net tax revenues over the budget estimate.
Assuming a marginal miss in miscellaneous capital receipts, the fiscal deficit is likely to print at Rs 15.7 trillion or 4.4% of GDP in FY26.
“We believe that government will push up capital expenditure by 14% to Rs 13.1 trillion, before fiscal rigidities in the form of higher committed expenditure set in from FY28 on account of the 8th Central Pay Commission recommendations on salary/pension revisions for Central government employees/pensioners,” Nayar said.
Despite a mild dip in the fiscal deficit-to-GDP ratio, the agency expects gross dated market issuances to rise sharply by 15-16% to Rs 16.9 trillion, led by a surge in redemptions, although this may be tempered by switching of G-secs.
Revenue receipts are set to trail the FY26 estimate by Rs 0.5 trillion, mainly due to the expected shortfall of Rs 1.3 trillion in net tax revenues over the budget estimate even as non-tax receipts are set to surpass the target by Rs 0.8 trillion. On the other hand, revenue expenditure is projected to print Rs 0.8 trillion lower than the estimate of Rs 39.4 trillion. We estimate revenue deficit at Rs 4.9 trillion in FY26, mildly lower than the budgeted Rs 5.2 trillion. However, the agency does not see any room for fiscal slippage in FY26, as it expects the revenue shortfall is matched by expenditure savings.