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FY27TD Center (INR4.5t) + states capex (INR1.8t) = INR6.3t, up 23.6% YoY

* Public capex remained the key fiscal growth lever in 4MFY27, with the Centre continuing to lead the investment cycle while states retained significant headroom to accelerate spending. Combined public capex remained strong in 4MFY27, with Centre and states together spending INR6.3t, up 23.6% YoY from INR5.1t.

* Central capex rose 29.9% YoY to INR4.5t, well ahead of 7.8% growth in revenue expenditure, led by defence (+40%), railways (+28%) and roads (+41%). Transfers to states remained strong at +75%, supporting state-level investment, whereas spending on telecom (-4%) and housing & urban affairs (-30%) declined. In terms of budget utilisation, railways (47%), roads (41%) and transfers to states (40%) are already relatively well advanced, while housing & urban affairs at 17% leaves greater scope for acceleration. The Centre has already utilized 36.9% of its FY27 capex budget, with the current INR1.1t monthly run rate above the INR1.0t required under the Budget.

* State capex also remained positive, but growth was uneven. Aggregate state capex increased 10.4% YoY to INR1.8t, while only 16.3% of the FY27BE had been utilized, leaving considerable scope for a pickup in the coming months. Maharashtra (+207.9%) was the standout, followed by Karnataka (+28.7%) and Gujarat (+10.9%). In contrast, capex declined in Madhya Pradesh (-21.2%), Uttar Pradesh (-3.8%) and West Bengal (-52.9%), highlighting the uneven nature of the state investment cycle.

* Importantly, the capex push is occurring alongside fiscal consolidation. Stronger receipts and contained revenue expenditure have helped keep deficits manageable: the Centre's fiscal deficit stood at 26.8% of FY27BE in 4MFY27 versus 29.9% a year earlier, while the combined state deficit was 20.6% of FY27BE versus 23.9%. With revenue expenditure growing much slower than capex at both levels, the overall fiscal mix remains supportive of investment-led growth without a significant deterioration in fiscal discipline.

Outlook:

* The FY27 growth outlook has improved, with stronger-than-expected 1QFY27 GDP growth and resilient July activity supporting our upgrade to 7.0–7.2% real GDP growth, from 6.8–7.0% earlier. Importantly, real fixed investment (11.2% YoY) remained a key growth driver in 1QFY27, with GFCF growth accelerating sharply, and this strength is being reinforced by continued public capex. Central capex rose 23.7% YoY in 1QFY27 and combined Centre and state capex reached INR6.3t in 4MFY27, up 23.6% YoY, indicating that the investment cycle remains firm.

* Fiscal policy is therefore likely to remain supportive of investment while broadly preserving the consolidation path. We expect the Centre’s fiscal deficit to widen to around 4.6% of GDP in FY27, versus the 4.3% Budget target, reflecting higher subsidies, lower fuel excise collections and modest slip in disinvestment and corporate tax receipts. However, the slippage appears manageable rather than structural, as revenue expenditure remains contained relative to capex and the government continues to protect productive spending.

* The stronger growth outlook makes the monetary policy path increasingly relevant. An Oct’26 rate hike remains a possibility if growth and inflation continue to surprise on the upside, although we expect the RBI to remain cautious initially and potentially prepare the ground for a Dec’26 hike. We do see a possibility of 50bps of rate hike by Feb-26 along with liquidity management tools to drawdown the excessive liquidity.

* Meanwhile, the fiscal slippage is unlikely to require additional dated G-sec borrowing given the government’s financing flexibility. We expect the 10-year G-sec yield to remain range bound 6.9-7.2%, as against the earlier expectation of 6.8- 7.0%. The upward revision reflects the hawkishness adopted by the RBI in the MPC policy minutes, hardening of US treasury yields, and still higher global fuel prices.

* Crude prices are likely to remain elevated and volatile in the near term, with Brent currently around USD90/bbl amid continued Middle East supply and shipping disruptions. A sustained rise in crude prices could intensify inflationary pressures, particularly through fuel and transport costs, while widening the fiscal and current-account burden, potentially delaying monetary easing and putting upward pressure on G-sec yields. Other downside risks include an adverse monsoon/El Niño, which could weaken rural demand and raise food inflation. A sharper-than-expected domestic inflation pickup could further constrain monetary policy support, while renewed geopolitical escalation remains a key risk to both crude prices and the broader growth outlook.

Centre: Strong revenue growth and capex momentum continue in Jul’26

Key takeaway:

The quality of spending remained favorable, with capex rising 53.7% YoY to INR1.1t, while revenue expenditure grew at a slower 9.2% YoY. Strong revenue growth and continued capex spending therefore allowed the Centre to maintain a manageable fiscal deficit while supporting investment-led growth.

* The Centre's fiscal position remained supportive in Jul'26, with total receipts rising 67.4% YoY to INR2.6t, driven by broad-based growth in tax and non-tax revenue, as well as higher non-debt capital receipts. Gross tax revenue increased 41.6% YoY in Jul’26, led by a 77.7% YoY jump in direct taxes as income tax collections surging 96.1% YoY and corporate tax increasing 28.2%. Indirect taxes also grew 13.3% YoY in Jul’26, supported by an 18.9% increase in GST and 43.0% growth in customs duty.

* Non-tax revenue increased 48.5% YoY to INR0.5t in Jul’26, while non-debt capital receipts more than doubled (+133.4% YoY), further supporting overall receipts. Consequently, net tax revenue rose by a strong 71.2% YoY to INR2.1t in Jul’26.

* Expenditure remained capex-led, with total expenditure increasing 18.5% YoY to INR4.0t in Jul’26. Revenue expenditure rose 9.2% YoY to INR2.9t in Jul’26, with interest payments (+32.1% YoY) and subsidies (+28.8% YoY) remaining elevated. In contrast, capital expenditure accelerated 53.7% YoY to INR1.1t, rising 23.7% MoM in Jul’26, reinforcing the government's continued focus on infrastructure-led spending.

* The fiscal deficit stood at INR1.5t in Jul'26, lower than INR1.9t in Jul'25, despite an 18.5% YoY increase in total expenditure. The improvement was supported by strong growth in total receipts (+67.4% YoY), which more than offset higher spending.

* Overall, July data points to a healthy fiscal mix, with strong revenue mobilization providing room for continued capital spending. The surge in direct tax collections and stable capex growth suggest that the government is supporting growth while keeping the fiscal deficit manageable

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