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FY27 fiscal risks have risen with re-ignition of the West Asia conflict and higher crude oil prices. A 58% rise in fertiliser subsidy powered 1QFY27 revex, while capex was also strong (23% YoY). LPG under recoveries of Rs.510 bn represent latent subsidies. Higher crude and fertilizer prices hurt fiscal math, as do softer income tax and GST revenues. Apart from stronger corporate taxes, fiscal buffers (Rs. 1tn ESF, gold import duties, petro export duties) are meaningful. Asset sales and lower capex spend could also be used to cushion the blow. For now, we expect fiscal slippage of up to 0.2% of GDP – this does not yet mean increased issuance with cash balances and other financing buffers.
Net revenue receipts grow 11% YoY FYTD; tax to fall short in FY27
Central net revenue receipts grew at 11% YoY in 1QFY27 (vs. -2% till May): the improvement largely reflects a high base of double devolution to states in Jun’25. Direct tax collections are up 13% YoY, led by corporate tax growth (+20%; weak base), while income tax collections remained weak (+8.5%). GST collections were 11% lower , on lower rates and draws from IGST. The income tax miss in FY26 (5.4% below RE) and corporate taxes (0.9% lower vs. RE) create a low starting level, pushing up implied growth to meet FY27 targets. Income tax could fall short by Rs. 760 bn even at a 12% growth.
Strong spending growth: lower interest payments & devolution cap fiscal deficit
Our ‘actual capex’ proxy shows growth stronger vs. headline. Capex in railways is up 31% YoY in 1Q while defence spending also saw an uptick in Jun (+42%). Ministry of Finance capex is up 223% (higher SASCI loans). Subsidy spending rose 37% YoY FYTD, driven by a 58% rise in fertiliser subsidies (+68% in Urea), while food subsidies also grew by 18%. Excluding interest, revenue expenditure grew 20% YoY ( interest payment: -10%, revex ex subsidy and interest: 7%). The fiscal deficit rose to just 18% of BE as the devolution base and lower interest payments offset spends elsewhere.
Prolonged conflict could drive fiscal deterioration, issuance spillover unlikely
Nominal GDP growth of 13% (vs. 10% BE) would mean no major impact on the deficit ratio from lower GDP in the new series. Higher subsidy payouts and personal tax shortfall are the key risks: urea prices are now 9% higher than pre-war levels and LPG under-recoveries of Rs.510bn till June representing latent subsidies. Excise duty cuts (~Rs.1.8tn;) are another headwind, with elevated oil prices limiting scope for reversal. However, existing fiscal buffers (Rs. 1tn ESF), export duties on petro products and higher import duty on gold (Rs.1.2-1.3tn) seem adequate to cushion the blow. Higher asset sales and lower capex spends might also ease the pressure. For now, we expect fiscal slippage to be up to 0.2% of GDP. Cash balances and other financing will likely prevent an issuance spillover.
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