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Despite rising fiscal deficit (9pp above trend), issuance slippage unlikely
The centre’s fiscal deficit rose to 42% of BE targets in Apr-Aug FY27. While this is well above the 5y avg of 33%, the difference will likely worsen in Sep with a truer picture of tax slowdown emerging as the deadline effect fades (FYTD direct taxes slowed 9pp in Aug) – though disinvestments might serve as an offset. Spending growth remains strong: revex (ex-interest, subsidies) rose 12% YoY, and capex slowed to 18%. We continue to see risks of a 20-30 bps fiscal shortfall even with slowing in subsidies’ growth and improved excise collections. Higher spending and personal tax shortfall are the key risks. Even with fiscal slippage, availability of buffers suggests issuance slippage is unlikely.
Weak direct taxes & base correction in devolution → lower net receipts’ growth
Central net revenue receipts growth decelerated to 3% YoY during Apr-Aug (vs. 19% till Jul). Direct tax collections’ growth was lower at 15% YoY (vs 24% till Jun) as both income and corporate tax fell YoY in Aug. Double devolution in Aug now matches that in Jun’25 and led net receipts’ growth down to a truer level. GST collections fell 3% YoY FYTD (from -5% ‘till Jul), though this was on Aug revenues up just 3% (high refunds, IGST payments). Miss on direct tax targets in FY26 (IT: 5.4% below RE) results in even higher growth required to meet FY27 targets: Income tax could fall short by Rs. 760 bn even at a 12% growth. The true extent of the shortfall is likely to become apparent next month as the impact of shift in payment deadline (from Sep’25 to Jul’26) fades.
Spending growth remains strong pushing fiscal deficit to 42% of BE
Even after a slowing in MoRTH spends in Aug, Centre’s FYTD capex growth was at 18% YoY (vs. 30% ‘till Jul). Our ‘actual capex’ proxy shows stronger growth vs. headline as spending on railways, defence and capex loans to states remain strong. Excluding interest and subsidies, revenue expenditure grew 12% YoY with defence and others; interest payment: -3%, subsidy payout growth slowed to 24% YoY). Strong spending growth compounds weaker net receipts, raising the fiscal deficit to 42% of BE (vs 5Y avg. of 33%).
Risks of a 20-30 bps fiscal slippage, but issuance slippage unlikely
2H G-Sec calendar indicates gross borrowings of Rs.16tn for FY27, implying no slippage on issuances. Nominal GDP growth of 12% after latest revisions (vs. 10% BE) would mean worsening of deficit ratio by 7bps. Income tax shortfall and higher spending to cushion the blow from W. Asia conflict are key risks. Though there are buffers with trade levies and the ESF (Rs.1tn), we see a risk of slippage of 0.2-0.3% of GDP. However, strong disinvestment receipts (Rs.558bn collected so far, higher cash balances, future spending compression and other financing will likely prevent an issuance spillover.
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