Fiscal deficit widens to 38.1% of FY26 target in first five months

India’s fiscal deficit touched Rs 5.98 lakh crore, or 38.1% of the full year FY26 target, in the April–August period, data released on Tuesday showed. This marked a sharp increase from 27% of the target in the same period last fiscal, as higher capital expenditure and weaker revenues weighed on the government’s finances. According to information, the government’s capital spending surged to Rs 4.32 lakh crore, accounting for 38.5% of the FY26 budgeted outlay, compared with 27.1% in the previous year. Spending remained strong in infrastructure, with expenditure for railways and roads reaching 52% and 43% of annual allocations, respectively.
On the revenue side, collections slowed. Net tax revenue stood at Rs8.1 lakh crore, or 28.6% of the full-year target of Rs28.37 lakh crore, compared to 33.8% in the corresponding period last year. Analysts attributed the drag partly to the income tax cuts in the Union Budget 2025, which reduced direct tax inflows, alongside modest growth in goods and services tax (GST) collections.
A Rs2.7 lakh crore dividend transfer from the Reserve Bank of India (RBI) helped cushion some of the shortfall. However, the Asian Development Bank (ADB), in its latest outlook, indicated a possible deviation from this year's fiscal deficit target,saying the government may find it difficult to meet its 4.4% deficit target for FY26, though the final number may still come in below last year’s 4.7% of GDP.“Tax revenue growth may be lower than expected, partly because GST cuts were not included in the original budget while spending levels are assumed to be maintained, pushing up the deficit,” ADB noted in its report.
Analysts, however, believe the deficit target is still achievable. Robust non-tax receipts could offset weaker tax revenues and keep the government on track. “These trends suggest some undershooting in FY26 budget estimates for gross tax revenues, particularly on the direct taxes side, which may also affect devolution to states. The GST numbers will need close monitoring to gauge the impact of rate rationalisation,” said Aditi Nayar, chief economist at Icra.
Gross tax revenues rose just 1% year-on-year in the April–August period, with income tax collections contracting 2% due to the extended filing deadline and base effects. Corporate tax growth was also subdued at 2%, while indirect taxes increased only 3.3%, dragged by weak customs duties and tepid GST growth.Despite fiscal pressures, economists said the Centre’s focus on capital expenditure has supported economic momentum, keeping infrastructure investments on track.

(Business Correpondent)