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FY27 fiscal risks appear manageable with the reopening of the Strait of Hormuz and oil markets normalising. Personal income tax miss in FY26 and current softness as well as weak GST collections implies a potential ~Rs1tn downside risk to FY27 tax collections, despite stronger corporate taxes. Capex growth remains strong led by railway projects. Spending has risen sharply, led by subsidies, but fiscal buffers remain meaningful: the Rs. 1tn ESF, higher gold import duties, normalising fertiliser prices, potential asset sales and capex flexibility should help limit slippage from the 4.3% deficit target.
FY27 Tax outlook: ~Rs 1tn downside risk, corporate collections strong
Central net revenue receipts fell 1.2% YoY FYTD, despite a record RBI dividend. Gross tax collections grew 1.8% YoY while net tax receipts fell 0.8% YoY, reflecting higher devolution to states (+7.4%) as the Centre ran surplus cash balances. GST collections were 12% lower, driven by a collapse in IGST and compensation cess. Direct tax collections rose 11.5% YoY, led by strong corporate tax growth (+26%; weak base), while personal income tax collections remained weak (+8.3% YoY FYTD). The income tax miss in FY26 (monthly numbers add to Rs12.4tn, 5.4% below RE) and corporate taxes (0.9% lower vs. RE) accentuates concerns on FY27 collections. Assuming 12% growth rate for income tax (vs. the implied rate of 18%) leads to a shortfall of Rs.762bn.
18% higher expenditure in Apr-May pushes FYTD fiscal deficit to 9.6% of BE
May fiscal balances have consistently turned surplus over the past three FY, reflecting record RBI dividend transfers. This lowers FYTD fiscal deficit (FD). Capex growth remains stronger vs. headline. Capex in Railway projects is up 43% YoY FYTD while capex allocation from Ministry of Finance is up 183% (primarily SASCI loans). Revenue expenditure excluding interest payments grew 19% YoY on an FYTD basis (interest payment +23%). Subsidy spending rose 47% YoY FYTD, driven by a 48% rise in fertiliser subsidies (+50% in Urea), while food subsidies also grew by 46%.
Risk of fiscal deterioration in FY27 now meaningfully lower
Due to a lower GDP base, even if FY27 nominal GDP growth is 12% (vs. 10.1% BE), the deficit ratio expands to 4.4% vs. the target of 4.3%. The higher expenditure due to subsidies is likely to be offset by existing buffers (Rs. 1tn ESF) and higher import duty on gold which may contribute Rs.0.5tn. Fertilizer prices have now normalised to pre-war levels thus alleviating pressure. The shortfall in direct tax collections can be met via more asset sales and lower capex spend. Excise duty cuts are another headwind which requires elevated fuel prices to recover the losses. While the trailing 12M FD is 4.7% of GDP, we expect fiscal slippage to be minimal.
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