Economy Update: India fiscal - In check by Kotak Institutional Equities
The RBI’s surplus transfer of Rs2.7 tn capped the center’s fiscal deficit at 1% of FY2026BE in 2MFY26. Expenditure growth in May was quite strong, balanced by robust growth in receipts. In 2MFY26, capital expenditure registered strong growth on the back of (1) a short-term loan (WMA) to FCI and (2) a sharp increase in defense spending in May. States in 2MFY26 have registered 12% growth in capex on a depressed base. We continue to expect the center to meet the GFD/GDP target of 4.4% in FY2026.
Non-tax receipts supporting capex increase and relatively muted direct taxes
Center’s total receipts grew 28% yoy in 2MFY26 (21% of FY2026BE), led by (1) the RBI’s surplus transfer of Rs2.7 tn, (2) GST collections (24% yoy) and (3) nondebt receipts (driven likely by asset monetization). Direct tax growth remained modest at 4.9% yoy (9.4% of FY2026BE). Corporate tax growth at (-)0.8% and personal income tax growth at 6.4% have likely worsened in 1QFY26, with data until June 19 indicating (-)4.5% growth in corporate tax and 1.7% growth in personal income tax. Center’s total expenditure grew 20% in 2MFY26, with a large increase in capital expenditure (54% yoy), led by (1) defense spending of Rs208 bn in May, possibly due to the India-Pakistan conflict and (2) the shortterm loan to FCI, which will be reversed this year. Strong receipts aided in keeping the fiscal deficit at 1% of FY2026BE (see Exhibit 1).
States’ fiscal quite lackluster in 2MFY26
Based on 24 select states’ data, own tax revenue growth has been quite tepid in 2MFY26 at 4.6% yoy (16.5% of FY2026BE). Total receipts growth was (-)0.3% (13% of FY2026BE) due to lower center’s tax devolution and grants. Expenditure growth was better at 8.1%, but on a low base in both revenue and capital expenditures. Capital expenditure growth was 11.8% in 2MFY26 compared to (- )12.6% in 2MFY25 (see Exhibit 2). Actuals for FY2025 indicate that capital expenditure growth was 9.2% (84% of FY2025BE (see Exhibit 3). We note that states, on aggregate, miss their budgeted capex targets by a wide margin (see Exhibit 4). In FY2025, actual capex for certain states has been lower than even the revised targets (see Exhibit 5). We note that states’ GFD/GDP has been budgeted at around 3.2% in FY2026BE.
Center’s GFD/GDP will be around budgeted 4.4% in FY2026
The central government is likely to maintain GFD/GDP at the budgeted target of 4.4% in FY2026. The RBI’s surplus transfer of Rs2.7 tn (Rs600 bn higher than budgeted) should offset potential slippages in net tax revenues (see Exhibit 6). We also see expenditure buffers (around Rs600 bn), if required, to reallocate spending toward (1) defense and internal security, (2) support to exports, MSMEs, etc. and/or (3) welfare schemes/rural infrastructure schemes, etc.; without deviating from the fiscal consolidation path.
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