India may miss FY26 fiscal deficit target of 4.4% on slower growth: BMI

BMI projects India's fiscal deficit to narrow to 4.5% of GDP in FY26, citing slower growth, tariff risks, and higher state spending as challenges to fiscal consolidation

The government is likely to miss its FY26 fiscal deficit target of 4.4 per cent, though only marginally, as economic growth underperforms projections, according to a report released by BMI, a unit of Fitch Solutions, on Tuesday. The report said potential aggressive US tariff hikes are the primary risk to fiscal improvement and could derail the fiscal consolidation agenda.

 

“Such a scenario would compromise growth, curtail revenue collection, and likely necessitate increased counter-cyclical spending. This would potentially derail the fiscal consolidation agenda, causing debt accumulation rather than reduction,” the BMI report said.

 

The report forecast the central government’s fiscal deficit to narrow from 5.1 per cent to 4.5 per cent of GDP in FY26.

 

 

The government’s fiscal deficit in April-June FY26 was Rs 2.8 trillion, or 17.9 per cent of Budget Estimates (BE), compared to 8.4 per cent in the first quarter of FY25, according to the latest data from the Controller General of Accounts.

 

The report noted that central revenues, now exceeding 10 per cent of GDP, are at levels not seen since FY2010-11 and have remained robust despite the substantial income tax threshold increase from Rs 700,000 to Rs 1.2 million — costing approximately Rs 1 trillion, or 0.3 per cent of GDP.

 

The net tax revenue of Rs 5.4 trillion stood at 19 per cent of BE in the first quarter of FY26, compared to 21.3 per cent in the first quarter last year, registering a contraction of 2 per cent year-on-year.

 

The BMI report expects the general government deficit to improve slightly from 8.2 per cent to 8 per cent of GDP in FY26.

 

“State governments may increase spending as political competition intensifies, partially offsetting the central government’s consolidation efforts,” the report said.

 

BMI’s commentary highlighted that the continued narrowing of fiscal deficits should gradually improve India’s debt position over the coming decade. “The government’s commitment to fiscal consolidation, even amid economic headwinds and electoral pressures, indicates a clear prioritisation of debt sustainability,” it noted.

 

The report said the government had reduced capital spending from 3.5 per cent to 3.2 per cent of GDP for the first time after seven consecutive years of increases, in order to compensate for the tax cuts.

 

The government’s capital expenditure in the first quarter of the current financial year reached Rs 2.75 trillion, or 24.5 per cent of BE. Capex, however, was still lower than 27 per cent of BE in the corresponding period of the pre-election year FY24.