India’s phase of high tax revenue growth appears to be over, with softer hiring, slower income growth, and muted corporate profitability weighing on government finances, according to a pre-budget analysis by Ambit Capital. 

“High tax growth period is behind us,” the report said, noting that gross tax revenue growth in FY26 has dropped sharply. It pointed out that “revenue momentum weakened sharply in FY26, with gross tax growth at 4% YoY in 8MFY26—the weakest since FY21.” 

The slowdown is largely attributed to a weakening in formal-sector activity. Ambit Capital said, “slower formal-sector hiring, uneven consumption, and muted corporate profitability have compressed buoyancy across tax categories and are likely to persist into FY27.” 

Govt on track to meet its fiscal deficit target 

Despite this, the government remains on track to meet its fiscal deficit target. “The government is on track to meet its 4.4% FY26 fiscal deficit target and will likely guide for a further reduction (4.3%) in the FY27 budget,” the report said. 

However, slower tax collections are forcing the government to depend more on other income sources. Ambit Capital noted that “non-tax revenue growth (13% YoY) led by RBI and PSU dividends would again be key to sustaining the fiscal consolidation path.” 

Capex moving into a more stable phase 

On spending, the report said capital expenditure is moving into a more stable phase.  

“Capex is entering a phase of normalisation,” it said, adding that fiscal constraints are pushing the Centre to rely more on public sector companies and states for investment. 

The report highlighted that “we do not expect a sharp moderation in public spending but view it as a nudge to PSUs (off-budget capex) and states (to support unorganised sector consumption).” It also noted that roads are likely to continue receiving support, while defence spending could rise due to security concerns. 

Ambit Capital also flagged rising pressure on state finances. “Slowing revenues and higher spending have pushed up state borrowings (18% CAGR, FY22-25),” it said, adding that limited relief is expected from the upcoming Finance Commission. 

On the fiscal framework, the report said the shift to a debt-based anchor could provide flexibility. “The new debt-to-GDP framework could unlock ₹14 trillion in borrowing space over five years,” it said, while also keeping the budget “low-noise” for markets. 

Overall, the report suggests that the government’s Budget strategy is adjusting to slower revenue growth, with a greater focus on non-tax income, controlled spending, and targeted capital investment rather than aggressive fiscal expansion.