Budget 2026: Will Govt Meet FY26 Fiscal Deficit Target? Economist Eyes Firm Capex Despite 'Tightness'

India’s central government can comfortably meet its FY26 (fiscal year ending March 2026) fiscal deficit goal by cutting spending amid strong real GDP growth, according to ANZ Research. Analysts believe that the economic outlook for FY27 and debt targeting approach suggests that there is no need to push the economy's fiscal consolidation harder.

''A mildly lower fiscal deficit ratio can deliver the desired debt-to-GDP ratio. The key expectation from the upcoming Budget session is that the government would be able to meet fiscal deficit target of 4.4% of GDP for FY26,'' said Dhiraj Nim, Economist/FX Strategist at ANZ Research.

In an exclusive interview with NDTV Profit on Jan. 13, Nim said that he expects a significant net tax shortfall given the unexpected decline in tax buoyancy over the course of the year. ''But, thanks to the large central bank dividend and some expenditure rationalisation both on account of capex and non interest revenue expenditure, the government would be able to just meet its fiscal deficit target,'' Nim told NDTV Profit.

This will be done by not upsetting the broader gross and net borrowing program. Looking ahead, for FY27, Nim believes that it is very important for the government to be conservative with tax assumptions. ''Even if the RBI dividends remain quite large, the government will have to reduce its expenditure by 20 bps of GDP to meet its fiscal deficit target which we expect to be 4.2% of GDP,'' explained the economist.

The fiscal deficit target for FY27 is an 'endogenous' target because the government is moving away from fiscal deficit targeting to debt targeting in the new fiscal. The government may target debt at 55% of GDP, as per Nim.

The fiscal consolidation will be 'gradual' or slower in FY27. Excess central bank dividend will remain a key source of revenue for the government. Given weak oil prices, we expect higher dividends from oil marketing companies as well, mitigating the stress from weak taxes. Overall, non-tax revenues could exceed budget estimates by 0.2% of GDP.

The economist expects fiscal prudence to be the center piece of the upcoming budget as he believes that the private business capex is on a revival path. ANZ Research expects a 'firm' capex growth despite the fiscal tightrope walk even at a time when the country's bond market braces for a heavy issuance pressure amid buying of government bonds.

Economists believe that the pace of decline in the general government fiscal deficit is set to ease into FY27. This means aggregate gross bond supply may grow faster than nominal GDP growth, creating risks of a supply overhang, especially amid increased repayment burden.

If tax growth does not rise sufficiently, fiscal stress could be felt across both levels of government. Since states do not have access to non-tax revenue sources like the RBI dividend, their budgets would likely be more constrained, especially with a rise in tendency for handouts and freebies.