Quote on Fiscal Deficit by Aditi Nayar, Chief Economist, ICRA Ltd
Below the Quote on Fiscal Deficit by Aditi Nayar, Chief Economist, ICRA Ltd
"The Government of India's (GoI's) fiscal deficit rose slightly to Rs. 3.1 trillion during Q1 FY2027 (18.2% of BE) from Rs. 2.8 trillion (18.5% of PA) in the year ago quarter. The expansion was largely driven by the sharp 24% expansion in capex in the quarter, notwithstanding a narrower revenue deficit compared to Q1 FY2026.
Interestingly, the GoI’s gross tax revenues rose by a sluggish 4% YoY in Q1 FY2027, led by a 22% contraction in excise duty collections, reflecting the impact of the duty cuts on petrol and diesel, and a weak growth in overall GST collections. The latter reflects a drag on account of IGST outflows as against large inflows in the year ago quarter, even as CGST collections expanded by a robust 17% in the current year. However, customs duty inflows surged by 36%, aided by the duty hikes on gold and silver, elevated global commodity prices, as well as a low base.
Among direct taxes, income taxes rose by a modest 7.0% in Q1, while corporate taxes grew by a robust 20% in the quarter, albeit on a favourable base.
Notwithstanding the sluggish growth in gross tax revenues, the GoI’s net tax collections rose by a healthy 17.8% in Q1 FY2027, with a second tranche of tax devolution not being shared with the states in June 2026 (unlike June 2025).
On the expenditure side, the GoI’s revex rose by 7.4% in Q1 FY2027, amid a double-digit contraction in interest payments, even as subsidies expanded by a sharp 37%, led by fertilisers. Excluding interest payments and subsidies, revex rose by a strong 16.4% during this quarter. Capex, on the other hand, expanded by a robust 24% during Q1 FY2027, amid a 66% expansion in June 2026. This is expected to augur favourably for GDP growth in the quarter.
We currently peg the net impact of the West Asia conflict on the GoI’s fisc at ~Rs. 1.25 trillion or 0.2% of GDP, assuming an average oil price of $80-85/bbl in FY2027. However, this could be matched by expenditure savings, which have ranged from Rs. 1.8-2.6 trillion during FY2018-2025, suggesting H2 borrowings may not need to be enhanced.
Looking ahead, while global energy prices had cooled by end-June 2026, tensions in West Asia have renewed since mid-July 2026. The duration of the West Asia conflict remains unclear, and a prolonging of the crisis could keep global energy prices elevated and volatile, while also disrupting the supply of key inputs for fertiliser production. This may have direct implications for the GoI’s fiscal position through several channels."
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