Thin margins: India’s budget walks a tightrope

India’s central government is spending faster than it earns this year. In the first half of FY27, from April to September 2026, the fiscal deficit reached Rs 7.1 trillion. That is 42.1 per cent of the full-year budget target. A year earlier, the figure was 36.5 per cent. The gap has widened by nearly six percentage points in just twelve months.

The fiscal deficit is the amount the government borrows to bridge the gap between what it spends and what it earns. When the deficit crosses 40 per cent of the full-year target in just six months, it leaves less room for the second half. It means the government must either raise more money, cut spending, or borrow more than planned.

The pressure on spending

Total spending rose 10.7 per cent in the first half, against a budgeted full-year growth of 9 per cent. The extra push came from subsidies, which are designed to shield citizens from global shocks but are politically hard to roll back.

Food subsidy rose 16 per cent. Fertiliser subsidy rose 11.2 per cent, even though the budget had assumed a 19.2 per cent fall. The reason is global price volatility. A West Asia conflict has kept oil and commodity markets on edge. The government responded by cutting fuel taxes and raising subsidies. That protects households from inflation, but it strains the budget.

CareEdge Ratings expects the total subsidy bill to be Rs 1.2 trillion higher than budgeted this year. Fertiliser prices have since eased slightly, so the final overshoot may be smaller. But the direction is clear. Subsidies are eating into the fiscal space that the government had planned for other priorities.

Capital spending, however, has held up. It rose 12.7 per cent in the first half. If we exclude a temporary Rs 500 billion credit to the Food Corporation of India, the growth was 13.9 per cent. This matters because capital spending builds roads, railways and power plants. It creates jobs and raises future incomes. Revenue spending, by contrast, covers salaries, pensions and subsidies. It keeps the system running but leaves fewer assets behind.

Capital transfers to states rose to 13.4 per cent of capital spending, from 9.8 per cent a year ago. The Centre is front-loading support to states so that they can start projects early. That is good for growth, but it also means cash leaves the Centre’s coffers faster.

Tax collections lose steam

On the income side, the picture is mixed. Gross tax collections grew only 6.1 per cent in the first half. The budget expects 9.4 per cent for the full year. That is a wide gap to close in six months.

Income tax revenues grew 8.7 per cent, against a budgeted 18.1 per cent. This is worrying because income tax is a steady, growing source. It reflects formal sector jobs and corporate profits. The shortfall suggests that salary growth and profit distributions have not kept pace with assumptions.

Excise duty fell 22.3 per cent against a budgeted growth of 13.8 per cent for the full year. The government cut the special excise duty on petrol and diesel to cushion retail prices after the West Asia conflict. CareEdge estimates the net revenue lost at around Rs 1 trillion. That is a direct hit to the excise line.

GST collections fell 5.5 per cent in the first half. Yet central GST rose nearly 15 per cent. The divergence suggests that state GST or integrated GST collections were weaker, possibly because of input tax credit adjustments or lower inter-state trade volumes. It is a puzzle that tax officials will need to watch closely. There are bright spots. Corporate tax grew 21.2 per cent, much higher than the budgeted growth of 12 per cent. That signals healthy company profits. Customs duty rose 16.5 per cent, helped by a hike in gold import duty in May 2026. These are welcome, but they are not large enough to offset the drag from excise and income tax.

Non-tax revenue grew 24.3 per cent. This includes dividends, fees and spectrum receipts. The jump is helpful, but non-tax revenue is often lumpy and unpredictable.

One-off receipts plug the gap

Two sources are filling some of the hole. Neither is guaranteed to last.

The RBI’s surplus transfer has exceeded Rs 2 trillion every year since FY25. The budget expects Rs 2.9 trillion from the RBI this year. Central bank dividends are not a tax. They depend on the RBI’s investment income, currency movements and accounting rules. They cannot be budgeted with certainty year after year. If global rates fall or the rupee swings differently, the next transfer could be smaller.

Asset sales are also moving. The government raised Rs 0.56 trillion from disinvestment in the first half. That is 70 per cent of the Rs 0.8 trillion target. The IDBI stake sale could bring in about Rs 260 billion more. This is progress, but disinvestment is slow and market-dependent. It cannot be turned on like a tap. These receipts are like windfalls. They help today, but they do not build a durable revenue base. A government that relies too heavily on them risks a funding crunch in a bad year.

The debt burden weighs heavy

Outstanding liabilities are estimated at 55.6 per cent of GDP in 2026-27. The government aims to bring this down to around 50 per cent by March 2031. That is a worthy goal, but the path is steep.

Interest payments are the silent killer. They take 26 per cent of total expenditure and 40 per cent of revenue receipts. Put simply, four in every ten rupees the government earns go to interest. That money cannot be spent on schools, hospitals, defence or roads. It goes to lenders who bought government bonds in the past. High interest payments also mean that every new borrowing is partly used to pay for old borrowing. This is not unique to India. Many nations face it. But in India’s case, the share is large enough to constrain choices. When a shock hits, the government has less room to borrow more without alarming markets. The Economic Stabilisation Fund, worth Rs 1 trillion, offers a buffer. CareEdge says this fund could absorb the expected deficit overshoot. That is why the rating agency does not see extra borrowing pressure this year. But a buffer is meant for emergencies. If it is used up to meet routine overshoots, it will not be there when a real crisis arrives.

What lies ahead

The budget targets a fiscal deficit of 4.3 per cent of GDP for FY27. That is slightly below the revised 4.4 per cent for FY26. CareEdge expects the deficit to exceed the budget by Rs 0.7 to 0.8 trillion. That would place it at 4.3 per cent to 4.5 per cent of GDP.

For the full year to stay close to target, three things must happen.

First, global commodity prices must stay stable. If the West Asia conflict escalates or oil spikes again, the subsidy bill will swell further. The government will then face an ugly choice: let fuel prices rise and anger voters, or cut taxes further and widen the deficit.

Second, income tax collections must accelerate sharply in the second half. They need to grow much faster than 8.7 per cent to meet an 18.1 per cent full-year target. That depends on year-end advance tax payments from companies and high earners. If the economy slows, this rebound may not come.

Third, disinvestment must stay on track. Markets are volatile. If sentiment sours, the IDBI sale and other deals could slip into the next year.

There is also the larger question of credibility. India has worked hard to earn stable sovereign ratings and investor trust. A persistent deficit slippage, even a small one, can raise borrowing costs for the government and for Indian companies that borrow abroad. Rating agencies watch the debt-to-GDP trajectory closely. The promise to reach 50 per cent by 2031 is only as good as the annual deficits that lead there.

The bottom line

The Centre is managing its deficit, but it is managing it with thin cushions. Subsidies are up. Core taxes are under pressure. One-off receipts are doing the heavy lifting. For the rest of FY27, the test is whether tax revenue catches up before the windfalls run out. If not, the government will have to choose between borrowing more and spending less. Neither is easy in a year when the global outlook remains uncertain and domestic expectations are high.

(The writer is with the Cholleti BlackRobe Chambers, Hyderabad, and his work spans economics, politics and law, bringing legal rigour and public-policy insight to contemporary debates)