Centre on track to meet FY27 fiscal deficit target, states may slip

The Centre is on track to meet its fiscal deficit target of 4.3% of GDP for FY27, supported by stronger revenue collections and controlled revenue expenditure, according to an analysis of government finances till July by Emkay Global. However, states are expected to see some fiscal slippage as revenue pressures persist and their focus on capital expenditure continues.

The Centre’s fiscal deficit stood at around 27% of the budget estimate (BE) in the first four months of FY27, lower than 31% during the same period last year and broadly in line with the three-year average of 27%.

Gross tax revenue growth accelerated to 11% year-on-year in the four months through July, compared with 4% growth until June and the 9% growth budgeted for FY27. The improvement was driven largely by a recovery in income-tax collections, while indirect tax collections also gained momentum.

Revenue expenditure remained controlled, growing 8% year-on-year, in line with the budget estimate. At the same time, the Centre continued to prioritise capital expenditure, which rose 30% year-on-year against the 14% growth budgeted for the full year. Around 37% of the budgeted capital expenditure has been achieved so far, with Defence, Roads and Railways driving the increase.

States maintain expenditure discipline

States have also remained in a relatively comfortable fiscal position, with their fiscal deficit at 22% of the FY27 budget estimate in the first four months, compared with 28% a year earlier and the three-year average of 23%.

State revenues grew 10% year-on-year during the period, up sharply from 3% growth until June. Central devolution rose 4%, compared with a 12% decline until June, while own tax revenue grew 16%, against a 21% budget estimate for FY27.

The Centre's release of an additional instalment of tax devolution in August is expected to provide further support to state finances. However, robust SGST growth of 16% was largely supported by higher IGST settlements from the Centre. Before settlements, SGST growth was only 5%.

States have continued to keep expenditure under control, with total spending growing 5% year-on-year. Revenue expenditure increased 4%, while capital expenditure rose 11%. This came despite a 70% year-on-year increase in transfers under the Centre’s capex loan programme during the first four months of FY27.

As a result, states’ fiscal deficit was 15% lower than in the corresponding period last year.

Oil prices, nominal GDP pose risks

The Centre is expected to meet its FY27 fiscal deficit target of 4.3% of GDP if Brent crude prices remain around current levels. Potential pressures from excise duty cuts and higher fertiliser subsidies could be offset by drawing down the Economic Stabilisation Fund, rationalising non-core capital and revenue expenditure, a potentially higher-than-budgeted RBI dividend and stronger import duty collections from precious metals.

However, a sustained Brent price above $90 a barrel could narrow the fiscal cushion and result in a slippage of around 0.2% of GDP.

Lower-than-budgeted nominal GDP growth is another risk. The FY27 Budget had assumed 10% nominal GDP growth over FY26. Following revisions to past GDP data, the budgeted FY27 nominal GDP level would now require around 13.5% growth, which could be difficult to achieve and may create a mild risk of fiscal slippage.

For states, the fiscal picture is expected to weaken somewhat through the year. Revenue growth could improve in the second half, which is seasonally stronger, while higher central devolution following additional instalments should support their finances.

Several major states, including Maharashtra, Andhra Pradesh, Karnataka, Telangana, Haryana and Uttar Pradesh, have also raised alcohol excise rates or revamped their excise policies over the past 18 months. This is expected to keep states’ excise revenue strong.

However, GST growth is likely to moderate, while grants could come in below budgeted levels. States are therefore expected to fall short of their optimistic FY27 revenue targets for both own tax revenue and central transfers.

Despite efforts to contain expenditure, revenue expenditure is expected to remain relatively sticky, while capital expenditure is likely to stay robust, supported by the Centre’s capex loan programme. States’ fiscal deficit is consequently expected to reach 3.3% of GDP in FY27, compared with the budgeted target of 3.1%.