Govt to stick to 4.4% fiscal deficit aim in FY26 but will need to 'manage' expenditure

In April-November, the Central government’s net tax revenue stood at Rs 13.94 lakh crore, which is 3.4 percent lower than last year

• Centre may cut expenditure to meet 4.4 percent fiscal deficit target in FY26
• Tax revenue and divestment receipts expected to fall short of Budget estimates
• Economists predict capex and revenue spending will be reduced to achieve target

Did our AI summary help?

Despite a higher than Budgeted nominal GDP--in absolute terms--a likely shortfall in tax revenue and divestment receipts may prompt the Central government to scale back on total expenditure to meet the full year’s fiscal deficit target of 4.4 percent of the GDP, economists say.

A senior government official echoes the same view. "The government will stick to 4.4 percent (of GDP) target of fiscal deficit this year, even though some expenditure will have to be managed," the person told Moneycontrol.

On Wednesday, the statistics ministry’s first advance estimates (FAE) data showed that nominal GDP will likely grow at 8 percent in FY26. This is lower than 10.1 percent growth assumed in the Budget. However, in absolute terms, the nominal GDP pegged by the first advance estimates is Rs 357.14 lakh crore for FY26, while the Budget pegged it Rs 356.97 lakh crore.

A back-of-the-envelope calculation pegs fiscal deficit, as a percentage of GDP, at 4.39 percent (round-off to 4.4 percent), when measured through FAE. This means, the Centre can spend around Rs 20,000 crore more than the Budget estimates--provided revenues stay unchanged--and still achieve the 4.4 percent of GDP target in FY26.

In fact, the Centre has sought an additional outlay of Rs 41,455 crore in its first supplementary demand for grants. But if this amount is added to total expenditure (again without changing the revenue math of Budget), the fiscal deficit will rise to 4.5 percent of the GDP.

Economists, however, say that Centre’s revenue target will not be achieved this year—mainly due a sharp decline in tax revenues, both direct and indirect.

According to DK Pant, Chief Economist at India Ratings and Research, the fiscal deficit target of 4.4 percent will be met in FY26, but through "expenditure cut". "There will be a shortfall in tax revenue as well as in divestment receipts," said Pant.

"In my estimates, the net tax revenue shortfall could be around Rs 1.4 trillion, and there could be a significant shortfall in divestment receipts too. In totality, the Centre will have to cut down on revenue expenditure along with capex to meet the 4.4 percent target," said Dhiraj Nim, economist, ANZ Bank.

In April-November, the Central government’s net tax revenue stood at Rs 13.94 lakh crore, which is 3.4 percent lower than last year. The Budget has assumed net tax revenue growth at 10.96 percent, amounting to Rs 28.37 lakh crore, in FY26.

The Centre’s disinvestment and asset monetization receipts—termed as 'miscellaneous capital receipts' in Budget--so far stands at Rs 23,717 crore – lower than Rs 47,000 crore estimated in the BE. The divestment receipts so far stand at Rs 8,768 crore, as per data available on Department of Investment and Public Asset Management (DIPAM) website.

Radhika Piplani, Chief Economist, Motilal Oswal Financial Services Ltd expects fiscal deficit to be marginally higher by than 4-5 basis points, which will be rounded off to 4.4 percent of GDP in FY26.