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4M FYTD central fiscal data shows weak direct taxes (-4.3% YoY) driven by 10% drop in income tax receipts even as corporate tax collections recover strongly in Jul. However, both income/corporate tax collections thus far are ~1pp below 5-10Y median and therefore, we don’t expect direct tax shortfall in FY26 to exceed Rs. 1.2tn. While FY26 fiscal deficit target (4.4% of GDP) may face pressure due to soft tax inflows and nominal growth risks, this can be managed via asset sales/higher PSU dividends and cuts to expenditure. As noted earlier, strong capex growth so far is likely due to accounting rules.
Direct tax collections weak: income tax down 9.9% YoY, corporate tax up 7.6%
FYTD central net revenue receipts are +5% YoY mainly due to the record RBI dividend (Fig 5). Gross tax receipts are up only 0.8% YoY as 9.8% growth in gross GST collections (Fig 4) were offset by weak income and corporate tax receipts (Fig 3). Net tax receipts are down 7.5% YoY as the centre transferred more to states (+17% YoY) likely as it had surplus cash.
Headline 33% YoY growth in 4MFY26 capex misleading; ‘actual’ growth ~14%
4M capex looks strong, but mostly due to accounting rules, e.g. Rs500bn of capex in the Dept. of food & public distribution vs. Rs0.2bn budgeted (appendix). Defence capex (+73% YoY) was likely boosted by emergency purchases. +3272% YoY growth in Telecom may also be some one-off payment. Subsidies fell 9.6% YoY in 4M (food subsidies fell 32% YoY, offsetting the large increase in fertilizer subsidies). These trends boosted 1Q GDP.
Continued weakness in receipts a concern, but FY26 deficit target not a risk yet
So far higher non-tax revenue has offset weakness in receipts, and upgrades to GDP for FY23-25 could have helped shrink the deficit ratio to 4.3% in FY26 (BE: 4.4%). But persistent weakness in tax receipts and downside risks to nominal GDP growth are risks.
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