India’s FY27 fiscal deficit seen widening amid conflict: BMI

India is likely to breach its fiscal deficit target for FY2026-27, as rising subsidy burdens driven by the ongoing West Asia conflict could strain public finances, according to research firm BMI.The firm expects the Centre’s fiscal deficit to widen to 4.5% of GDP, overshooting the budgeted target of 4.3%, even as the government continues to emphasise fiscal consolidation.
In the Union Budget, the Government of India had projected a fiscal deficit of 4.3% for FY27, marginally lower than the revised estimate of 4.4% for FY2025-26. Fiscal deficit represents the gap between government expenditure and revenue, and a higher deficit typically translates into increased borrowing.BMI noted that risks to the fiscal outlook have intensified following the escalation of the West Asia conflict, which has pushed up global prices of oil, gas, fertilisers, and other key commodities. These price pressures are expected to significantly raise the government’s subsidy bill, particularly for fuel and fertilisers.The report said India’s policy response to the conflict could further stretch finances, with potential increases in support for industries impacted by supply disruptions. The government may also introduce measures to stabilise costs for businesses and ensure availability of critical inputs.
Union Finance Minister Nirmala Sitharaman has described the geopolitical tensions as a “systemic tremor” but has reiterated the Centre’s commitment to adhering to the fiscal deficit target.As part of its response, the government has set up a Rs1 lakh crore Economic Stabilisation Fund, which BMI estimates could add about 0.1% of GDP to fiscal expenditure in FY27. The proceeds are likely to be used for additional subsidies on energy and fertiliser products, as well as temporary tax relief measures.
According to information,the Centre has already cut customs duties on petrol and diesel to cushion retail prices and introduced tax concessions for firms operating in Special Economic Zones. BMI also expects the government to consider steps such as restricting exports of scarce inputs like helium and sulphur to protect domestic industries, including semiconductor manufacturing.
The surge in energy prices has been exacerbated by tensions around the Strait of Hormuz, a critical global shipping route for crude oil and natural gas. Brent crude prices have climbed sharply in recent weeks, adding to inflationary pressures and subsidy requirements.While India had reduced spending on energy and fertiliser subsidies to around 1.5% of GDP in recent years through fiscal consolidation efforts, BMI expects this figure to rise again in FY27 due to elevated global prices and domestic support measures.To manage spending, the report suggested that the government may defer several energy-intensive infrastructure projects to the next fiscal year. At the same time, it is likely to continue pursuing long-term fiscal consolidation even as near-term pressures mount.Overall, BMI maintained its forecast of a 4.5% fiscal deficit for FY27, cautioning that evolving geopolitical risks could further widen the gap between budget estimates and actual outcomes.

(Business Correspondent)