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Signs of fiscal resilience are visible, with income tax up 13% and corporate tax up 9% during Jul–Oct, signaling recovery after Q1 weakness. GST collections were muted amid IGST and cess weakness. Capex spend remains strong despite headline distortions, while subsidies and revenue expenditure ex-interest declined. Despite slippage in tax receipts vs. target and nominal GDP risks, we expect low risk to FY26 fiscal deficit target as the shortfall can be managed via asset sales/higher PSU+RBI dividends.
Direct tax: income tax collections +7% YoY FYTD but +13% YoY during Jul-Oct
FYTD central net revenue receipts rose 3.5% YoY, driven by a record RBI dividend. Net tax receipts fell 2.4% YoY due to higher state transfers (+16%), aided by surplus cash. Gross tax receipts grew 4% YoY: GST collections were muted (+1%, due to weakness in IGST but more importantly compensation cess), while direct taxes rose 6%—income tax up 13% and corporate tax up 9% during Jul–Oct, signaling recovery after 1Q weakness.
The gap between headline capex growth vs. ‘actual’ growth now narrowing
Capex is still strong, but accounting rules distort headline, e.g. Rs500bn of capex in the Dept. of food & public distribution vs. Rs0.2bn budgeted (See appendix). +246% YoY growth in Telecom may also be some one-off payment. Subsidies fell 1% YoY in 7M (+20% YoY in fertilizer subsidies was offset by the decline in food subsidies which fell 17% YoY). Revenue expenditure excl. interest payments fell 5.4% YoY (FYTD).
Weakness in receipts now less of a concern, FY26 deficit target not a risk yet
While upgrades to GDP for FY23-25 may have shrunk the FY26 deficit ratio to 4.3%, tax receipts are expected to be meaningfully lower vs. target. Despite downside risks to FY26 nominal GDP growth, we don’t expect a major fiscal strain or a risk to the 4.4% target.
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