FY27 fiscal deficit may overshoot target by up to ₹1 lakh crore, savings can absorb it: ICRA

ICRA expects the government's fiscal deficit to overshoot the FY27 budget estimate by around ₹0.9-1 lakh crore, but said the slippage can be absorbed through expenditure savings and higher small-savings inflows.

The government's fiscal deficit stood at ₹4.6 lakh crore during April-July, or 26.8% of the FY27 budget estimate, compared with ₹4.7 lakh crore, or 30.8% of the FY26 provisional actuals, in the year-ago period, ICRA said in its latest report on government finances.

The rating agency attributed the marginal narrowing of the deficit to a sharp reduction in the revenue deficit, which fell to ₹0.4 lakh crore from ₹1.5 lakh crore a year earlier.

However, the benefit was largely offset by a nearly 30% increase in capital expenditure.

Net tax revenues rise sharply

ICRA said gross tax revenues grew 11.4% year-on-year to ₹12.2 lakh crore in the first four months of FY27, while net tax revenues jumped 27.6% to ₹8.4 lakh crore.

The faster growth in net tax receipts was partly due to a 13.1% decline in central tax devolution to states during April-July.

The agency noted that the pace of net tax revenue growth is likely to moderate as the government released two tranches of tax devolution to states in August, compared with one tranche in August last year.

Personal income tax, excise collections may miss targets

ICRA said the government may fall short of its FY27 targets for personal income tax and union excise duty collections.

To meet the overall gross tax revenue target of ₹44 lakh crore, collections need to grow 8.7% in the remaining eight months of FY27.

While customs duty collections surged 38.2% during April-July, helped by higher duties on gold and silver imports, excise duty collections fell 23.1% following the cut in duties on petrol and diesel at the beginning of the fiscal.

ICRA expects the shortfall in excise and personal income tax collections to be partly offset by higher-than-budgeted customs duty receipts.

The government's capital spending jumped 29.9% to ₹4.5 lakh crore in April-July, with spending by the defence, road transport and highways and railways ministries rising 41%, 40.6% and 28.4%, respectively.

Capital transfers to states also increased 75.4% to ₹70,722 crore.

West Asia conflict to widen fiscal deficit

ICRA has estimated a net fiscal slippage of around ₹95,000 crore from the impact of the West Asia conflict, higher subsidies, lower excise and direct tax collections and reduced oil marketing company dividends.

This is expected to be partly offset by higher customs duty collections and a ₹1 lakh crore allocation under the Economic Stabilisation Fund.

"While ICRA estimates the fiscal deficit to overshoot the FY2027 BE by ~Rs. 0.9-1.0 trillion, this could be comfortably absorbed by expenditure savings," the report said, noting that such savings amounted to ₹1.6-1.7 lakh crore in FY2025-26.

The agency also said the government's gross market borrowing requirement for FY27 has come down to ₹15.8 lakh crore from the budgeted ₹17.2 lakh crore after accounting for debt switches and buybacks.