The Centre capped the fiscal deficit target at 4.4% of gross domestic product (GDP) in 2025-26, meeting its post-pandemic fiscal consolidation goal. While this suggests the government is committed towards fiscal discipline, the math behind the achievement reveals a worrying trend—sharp cuts in expenditure, while the subsidy bill shot up amid the West Asia war.
Swelling subsidy
One of the biggest pressures from the West Asia war was the fertilizer subsidy bill. With just one month of the war’s impact, the government’s FY26 subsidy bill reached 113% of the revised estimate, complicating the fiscal math. At ₹2.1 trillion, this was also the highest fertilizer subsidy since the initial impact of the Ukraine war in FY23, underlining India’s high exposure to global fertilizer prices and the burden on the government as it protects farmers from the risks.
Yet, the additional burden of ₹377 billion (or 0.1% of GDP) did not impact the government’s fiscal discipline. The answer lies in sharp ministry-wise cuts and a sombre capital expenditure.
Capex curb
After an aggressive push for growth through capital expenditure in the past pandemic period, the government had already started setting lower increases. As per the revised estimate, capex was expected to grow just 4.2% year-on-year in FY26 to ₹11 trillion (revised down from budgeted ₹11.2 trillion). However, this was also missed by the end of the year. The government managed only ₹10.7 trillion, recording a mere 1.6% growth, and meeting only 97.6% of the revised aim.
To be sure, achieving ₹10 trillion-plus capex is still huge, but the tapering suggests the government’s tight finances. After achieving a capex of 3.3% of GDP in FY24 and FY25, the government managed only 3.1% in FY26.
Broad cuts
The government has been managing its finances by cutting expenditure of several ministries by the end of the year. An earlier showed that between FY23 and FY25, 12-13% of ministries spent less than 50% of their allotted funds, compared with just 2-3% on average in the decade preceding the pandemic. This was also visible in FY26, with nearly 30 ministries undershooting their budgeted estimates by 10% or more.
Despite sharp cuts in revised estimates, several key ministries like housing and urban affairs, women and child development, science and technology, and minority affairs, among others, struggled to meet their revised estimates. This opened up the fiscal space needed to finance higher subsidy bill.
Dividend drive
In the past few years, the government has been managing its tight finances through higher dividend payouts, particularly from the Reserve Bank of India (RBI). This was again the case in FY26 as transfers in form of dividends and profits came in at 101% of the revised estimate at ₹3.8 trillion ( ₹2.9 trillion from the RBI).
This helped soften the blow on the tax side, which has been struggling due to rate rejig in income tax and goods and services tax (). Gross tax collections missed the revised aim by 1.3% and were only 94% of the budgeted aim. Income tax, in particular, was hit, reaching only 90.2% of the revised aim.
Cloudy outlook
While the government met its fiscal deficit target in FY26, economists still see fiscal slippage in FY27, particularly due to pressures from the West Asia war. The government started the year with stretched finances, with revenue deficit already reaching 30.8% of the budgeted estimates and fiscal deficit touching 21.4% in just one month. This was driven by a mix of lower revenue momentum as well as higher expenditure drive.
“While there is likely an element of front-loading in this data with the government trying to firefight the macro implications of the prolonged , this poses early risks to our base view that the fiscal deficit target for FY27 will be met,” Barclays noted in a note last week.