Fiscal Deficit Widens to Rs 7.1 Lakh Cr Till August, To Overshoot FY27 Budget Estimate

Chennai: In the five-month period between April and August, the Central government’s fiscal deficit widened to Rs 7.1 lakh crore or 41.9 per cent of the full-year Budget Estimate. Given the revenue shortfall anticipated on the taxes side and additional subsidy requirements for fuel and fertilisers, the fiscal deficit is likely to overshoot the FY2027 Budget Estimate by Rs 1.3-1.4 lakh crore, finds ICRA.

In the five-month period, the fiscal deficit was at Rs 7.1 lakh crore against Rs 6 lakh crore in the same period last year. The sharp rise in the fiscal deficit in the month of August 2026 was led by the release of an extra tranche of devolution to the states after the release of a double tranche in July in 2025.

Higher revenue deficit and double-digit capex expansion led to the widening of fiscal deficit.

The Centre’s gross tax revenues rose by a modest 6.5% YoY in 5M FY2027, amid the sharp 23% contraction in excise duty collections, owing to the excise duty cuts on petrol and diesel earlier in the fiscal year, even as most other taxes posted a double-digit growth during this period.

Given the FY2027 BE and the provisional 5-month trends, the Gross Tax Revenue needs to expand by 10.9% YoY during September-March FY2027, slightly lower than our expectation of nominal GDP growth. This warrants a 21% growth in income tax collections, albeit on a low base, and a 31% expansion in excise duty collections, both of which are unlikely to materialise, leading to a miss on these accounts. However, this would be partly offset by higher-than-budgeted collections on the customs duty front, aided by the duty hikes on gold and silver imports.

On the expenditure side, Centre’s capex declined by 30% in August 2026, after surging by 60% in June-July 2026. The capex growth tempered to 18% during 5M FY2027.

Revenue expenditure, on the other hand, grew by 8% during 5M FY2027, amid a sharp 24% expansion in subsidy payouts, even as interest payments declined by 3% during this period. Excluding interest payments and subsidies, revenue expenditure rose by a robust 12.5% during this period.

ICRA estimates the fiscal deficit to overshoot the FY2027 BE by Rs. 1.3-1.4 lakh crore. However, this could be absorbed by expenditure savings, which amounted to Rs. 1.6-1.7 lakh crore during FY25-26. Small savings inflows have remained quite strong and are likely to overshoot the budgeted levels for FY2027. This would provide some cushion to the Centre to raise additional borrowings in H2 FY2027 beyond what is indicated, even if there is a fiscal slippage.