India’s Fiscal Deficit Swells, Yet 4.4% Target Still Within Reach
India’s fiscal performance in H1 reflects a calculated front-loading of capex to support growth, while record non-tax revenues offer a buffer. Execution risks remain in H2, but the government appears confident in meeting its 4.4% deficit target without derailing market or reform momentum.
India’s central government reported a fiscal deficit of INR 5.73tn for the first half of FY26 (April–September), amounting to 36.5% of its full-year estimate, according to the latest data. While this marks a notable increase from the INR 4.75tn shortfall seen in the same period last year, the rise reflects a planned rebound in capital expenditure following election-linked delays in FY25, rather than a structural fiscal slippage.
Spending Momentum Led by Infrastructure Push
Total expenditure rose to INR 23.03tn in H1, equivalent to 43.5% of the FY26 Budget target. Crucially, capital expenditure surged 40% yr/yr to INR 5.8tn—over half of the full-year allocation. This confirms the government’s intent to maintain infrastructure momentum as a driver of economic resilience, even in a context of tighter global financial conditions and subdued external demand. The capex push has been broad-based, spanning transport, digital infrastructure, and defence, and remains a cornerstone of the government's medium-term fiscal and growth strategy.
Revenue Performance Mixed, Non-Tax Windfall Cushions Shortfall
On the revenue front, net tax collections stood at INR 12.3tn, or 43.3% of the annual target—down 2.8% from last year. This dip is largely attributed to softer corporate and indirect tax inflows. Corporate tax collections rose just 1.1% yr/yr, while GST revenues will likely be revised after the recent rate rationalisation, effective from late September, begins to feed into the data. The October GST print will be critical to assessing whether the streamlined structure leads to a meaningful revenue dip. By contrast, income tax receipts rose 4.7% to INR 5.9tn, with a further boost expected in October due to the extended payment deadline. More importantly, non-tax revenue has emerged as a key buffer. The government has already mobilised INR 4.66tn—almost 80% of its FY26 target—helped by record transfers from the Reserve Bank of India (INR 2.56tn) and strong dividends from public sector undertakings.
Table 1: India H1-FY26 Fiscal Metrics
| Actuals (INR tn) | H1- FY25 | H1- FY26 | change, % y/y |
| Total receipts | 16,369.70 | 17,302.20 | 5.70% |
| Revenue receipts (A+B) | 16,223.70 | 16,954.50 | 4.50% |
| Tax revenue (net) | 12,651.60 | 12,293.70 | -2.80% |
| Non-Tax Revenue | 5457.01 | 5,830.00 | 6.80% |
| Total expenditure | 21,114.90 | 23,033.40 | 9.10% |
| Revenue expenditure | 16,965.30 | 17,225.90 | 1.50% |
| Capital expenditure | 4,149.70 | 5,807.50 | 40.00% |
| Fiscal deficit | 4,745.20 | 5,731.20 | 20.80% |
| Total financing | 4745.20 | 5,731.20 | 20.80% |
Source: Continuum Economics
Borrowing Mix Tilts Domestic
To finance the deficit, the government has leaned heavily on the domestic bond market, borrowing INR 5.7tn in H1—around 37% of its full-year plan. The reliance on domestic issuance remains prudent, though it raises questions about crowding out in the credit market as private investment demand picks up.
Outlook: On Track, But Risks Persist
Despite the wider H1 deficit, the government appears broadly on course to meet its FY26 fiscal deficit target of 4.4% of GDP. Strong non-tax revenues, expected backloading of tax inflows, and continued capital discipline support the outlook. However, global headwinds—including weak exports, geopolitical uncertainty, and elevated subsidy spending on food and fertilisers—pose downside risks to the fiscal trajectory in H2. Ultimately, the ability to contain expenditure leakages and sustain revenue buoyancy—especially under the revised GST regime—will determine whether New Delhi can navigate its fiscal path without sacrificing its growth imperatives.