'India's fiscal deficit may rise to 4.7% of GDP in FY27 amid West Asia war'

India's fiscal deficit may widen to 4.7 per cent of GDP in FY27 as higher oil prices, subsidy costs and revenue risks from the West Asia conflict weigh on finances, writes Aditi Nayar of ICRA

The Government of India's (GoI) fiscal deficit turned out to be somewhat better than expected in 2025-26 financial year (FY26). Subsequently, the West Asia conflict has cast some clouds on the fiscal outlook for FY2027. Higher expenditure requirements and potential revenue misses could create a fiscal slippage in FY2027, notwithstanding some buffers. While the cooling in crude oil prices over the last few sessions comes as a relief, they remain well above the levels that would provide comfort on the macro front.

 

For starters, as per the provisional actuals (PA) released by the Controller General of Accounts (CGA), the GoI managed to curtail the fiscal deficit at ₹15.2 trillion in FY26 -- ₹0.4 trillion lower than the Revised Estimate (RE) for the fiscal. This benefitted from ₹0.6 trillion expenditure compression vis-à-vis the RE, notwithstanding a ₹0.2 trillion overshooting in fertiliser subsidy pay-outs, amid large transfers in March 2026, and a ₹1.0 trillion allocation towards the Economic Stabilisation Fund (ESF). The latter would provide some

 

fiscal cushion in the ongoing fiscal.

 

Without this ₹0.4 trillion paring in the size of the deficit, the fiscal deficit-to-GDP ratio would have amounted to 4.5 per cent, exceeding the target of 4.4 per cent for the fiscal. However, a downward revision in the nominal GDP numbers as per the new 2022-23 GDP series has helped contain the fiscal deficit to at the targeted 4.4 per cent.

 

The misses on tax collections in FY26 have steepened the required growth rates for the same in FY27. The ₹0.6 trillion shortfall in personal income taxes in FY26 implies that the embedded growth target for the same now stands at a higher 17.7 per cent in FY27 relative to the 11.5 per cent pegged in the Union Budget. This is a tall ask, and a large miss seems likely on this account. This would add to the ₹1.1 trillion shortfall anticipated on account of the excise duty cuts on petrol and diesel during the fiscal. Besides, the growth in corporate tax collections is also expected to remain subdued as higher input costs impact margins and hurt profit growth.

 

While the Oil Marketing Companies (OMC) have cumulatively raised Retail Selling Prices (RSP) of petrol and diesel by around ₹7.5/litre each, the hike is relatively modest. They may well continue to incur losses if crude oil prices persist above $95/bbl for a sustained period. This would also lead to lower dividend as well as corporate tax pay-outs by these companies to the GoI, exerting further strain on the fiscal. Lower tax receipts would partly transmit to slightly narrower tax devolution for the states.

 

Besides, this would also necessitate some budgetary allocations to cover losses in the form of higher fuel subsidies, including those for LPG, apart from petrol and diesel. While estimating an amount for this is difficult, elevated energy prices would ensure that this amount is fairly large.

 

Besides, as per ICRA's estimates, the revised nutrient based subsidy (NBS) rates notified for the FY27 Kharif season remain inadequate, considering the surge in ammonia and sulphur prices. ICRA expects the profitability of the fertiliser players to be impacted in the near-to-medium term unless the industry increases retail prices sharply and/or the subsidy rates are revised by the GoI. Overall, the subsidy requirement for FY27 is likely to exceed the current budgetary allocation by at least ₹0.5 trillion. Given the GoI’s focus on ensuring fertiliser availability, additional allocations are expected during the year.

 

Notwithstanding these material fiscal pressures, there are some buffers available with the GoI. For one, the sharp hike in customs duty on gold and silver is expected to boost such collections by as much as ₹0.5 trillion in the fiscal. Besides, the ₹1.0 trillion held in the ESF would also provide a sizeable cushion to absorb the initial hit from the shortfall in taxes or higher expenditure requirements, although further revisions in RSPs may be in the offing.

 

We currently peg the net impact of the West Asia conflict on the GoI’s fiscal at approximately ₹1.3 trillion, assuming an average oil price of $95/barrel in FY27, with a decline to an average of ~$80/barrel in the second half of the fiscal. This would entail a fiscal slippage of ~30 bps, in addition to the ~10 bps estimated on account of a lower nominal GDP print vis-à-vis that used at the time of the presentation of the Union Budget for FY2027. 

 

Overall, we expect the fiscal deficit to print at ~4.7 per cent of GDP in FY27, as against the budgeted 4.3 per cent. The slippage anticipated by us is relatively moderate, especially when compared with the yawning fiscal deficit incurred during the Covid-19 pandemic, when the GoI’s revenues had dried up. Besides, the GoI has typically generated large expenditure savings across Ministries/Departments over the years, which could also provide some respite.

 

Moreover, the FY2026 PA also provide a silver lining in the form of an overshooting to the tune of ₹1.0 trillion in small savings inflows, which has led to an increase in the cash balances of the GoI, as against a drawdown envisaged as per the RE for the fiscal. The carry forward of cash balances may prevent market borrowings from materially exceeding the budgeted levels in FY27, despite the feared fiscal slippage, offering some relief to the bond markets.

   

Aditi Nayar is Chief Economist, Head- Research & Outreach at ICRA. Views expressed are her own.