FY26 fiscal deficit pegged at 4.4%: Math unlikely to be hit

The Centre is confident of containing its FY26 fiscal deficit at the budgeted level of 4.4% of gross domestic product (GDP) despite potential revenue losses from the reduction in goods and services tax (GST) rates on most products, a senior finance ministry official told ET on Thursday.The government has estimated potential losses of ₹48,000 crore in tax revenues due to the GST cuts, based on the FY24 consumption pattern.

However, an expected boom in the consumption of various goods from televisions to small cars, especially during the festive season, due to a drop in prices would partly offset the FY26 revenue losses. Gains from the consumption surge would be far higher next fiscal year, the official said. To be sure, the government would have to accommodate likely financial assistance for exporters this fiscal to soften the impact of high US tariffs. The official, however, emphasised that the additional costs can be absorbed within the overall spending limits.

He noted that the government would reprioritise some of its planned expenditures in the second half of the fiscal, besides making savings on certain spending heads. These steps would also help contain the fiscal deficit, he said. Notably, the FY26 nominal GDP is required to grow only about 8%, instead of 10.1%, to reach the budgeted target of ₹356.98 lakh crore, as economic output in FY25 beat the initial projection. Despite a moderation in inflation, the official reckoned that nominal GDP, in absolute terms, could exceed the FY26 budgeted goal, helping the government meet the targeted fiscal deficit ratio that is pegged to economic output in current prices. Nominal GDP grew 8.8% in the June quarter despite lower inflation.

The finance ministry will start the FY27 budget-making exercise from October 9 when it will also deliberate on the revised expenditure estimates firmed up by various departments for the current fiscal. The government has budgeted FY26 spending at ₹50.65 lakh crore and fiscal deficit at ₹15.69 lakh crore. This year’s fiscal deficit until July widened to 29.9% of the annual target against 17.2% a year before, because of a frontloading of expenditure amid a contraction in the net tax mop-up.