Budget 2026: Taking stock of FY26 arithmetic
The FY27 Budget will take stock of the FY26 fiscal arithmetic while outlining the government’s priorities for the year ahead. In an earlier piece, we highlighted potential thrust areas for policy action. In this second part, we assess the FY26 pressure points and examine their implications for the fiscal maths.
Also Read: India’s Budget 2026 to support new and strategic ambitions
Firstly, the impact of the prevailing sub-9% nominal GDP versus the budgeted 10.1% for FY26 on the fiscal maths will be minimal. Let us explain. The first advance GDP growth estimate at 7.4% was near street expectations, capturing data up to November 25 – early December 25, lending an upside bias to the second reading/actual release, similar to the past. The GDP deflator has been estimated at 0.5% versus 3.1% last year, the lowest in nearly five decades.
Nominal GDP pace is a more crucial input for budgetary ratios. Although FY26 nominal GDP growth of 8% is weaker than the budgeted 10.1%, the nominal FY25 value fared better than estimated. FY25 nominal GDP rose to INR 330trn from a budgeted INR 324trn, raising the comparative base for FY26 and thereby making 8% growth adequate to meet the FY26 deficit ratio. In effect, the stronger-than-expected nominal GDP base in FY25 reduces the risk that FY26 deficit targets will be missed solely because of slower nominal growth.
Also Read: Sitharaman & Co will be counting every rupee on the road to Viksit Bharat 2047
Budget 2026 pressures: Wider deficit, front-loaded spending
Secondly, the April–November 25 deficit was wider than the corresponding period last year. The 8MFY26 deficit reached 62.3% of the annual target compared to 52.5% at the same time in FY25. Total receipts stood at INR 19trn (55.7% in 8MFY26 versus 59% last year), while expenditure was at INR 29.2trn (57.8% versus 56.9%). This is also reflected in the wider run-rate of the primary deficit (fiscal deficit minus interest payments). The 8MFY26 primary gap stood at 78.9% of the full-year target versus 41.8% at the same time in FY25. Much of this was on account of front-loading of capital expenditure (capex) spending, while revenues lagged.
Union Budget revenues: Tax miss looms despite dividend support
Next, net tax receipts are on course to miss budgeted estimates due to the GST rate rationalisation measures, direct tax relief and lower tax buoyancy on the back of weaker nominal growth. The miss is evident under direct taxes – corporate as well as income tax – which need to rise 11.7% year-on-year and 43% respectively in the remaining four months to meet the annual budgeted targets.
While seasonally, there is some extent of catch-up in direct collections late quarter/year, there is likely to be an undershoot on an annual basis, especially personal income taxes due to cuts announced in last year’s budget, while corporate collections might meet the FY26BE. Higher dividends from the central bank and oil companies will be a key tailwind, offsetting slower tax takeaways.
Click here to catch all latest developmens on India Budget 2026
India Budget 2026 maths ahead: Limited room for consolidation
Expenditure compression will also be a crucial part of the balancing maths. Spending is up 6.7% year-on-year in 8MFY26, much due to an increase in revenue allocations, particularly towards subsidies, while capital spending is up 28% year-on-year against the budgeted pace of 10%. For the remaining four months of FY26, we expect revenue operating expenditure (opex) to pick up momentum, while capital spending slows down due to the strong year-to-date catch-up. We expect a small undershoot in capital spending (-0.1% of GDP) and slower revenue expenditure to pick up some of the slack from slower revenues.
Looking ahead, the room for aggressive fiscal consolidation from here on is limited ahead of the Pay Commission rollout, which will require the centre to put aside an estimated INR 2.0-2.5trn through to FY28. Add to this, slower nominal growth stands to complicate the debt reduction path, with the projected starting point of 56.1% of GDP in FY26 likely to undergo a small revision.
To draw out a path ahead for public/general government (state and centre) debt levels, a few underlying assumptions are required including: a) annual deficit level (flow) for the centre and states separately; b) nominal GDP growth rate; and c) in-built deflator forecasts. Other variables that will also influence the consolidated debt to GDP ratio include the spread between the borrowing costs and the nominal GDP growth rate, with the latter being higher than the borrowing cost making it feasible to lower debt levels. Concurrently, a correction in the primary deficits (of states and centre), i.e., fiscal deficit minus interest payments, which reflect the underlying fiscal stance, would also be crucial to moderate the debt stock.