India’s FY27 Fiscal Target: Centre on Track, States Face Slippage

India’s central government is poised to achieve its fiscal deficit target of 4.3% of GDP for FY27, according to an analysis of government finances through July by Emkay Global. This positive outlook is primarily due to robust revenue collections and disciplined expenditure management.

Conversely, states are projected to experience fiscal slippage, with their deficit potentially exceeding budgeted levels as revenue pressures persist alongside a continued focus on capital expenditure.

Centre’s Fiscal Discipline and Revenue Growth

The Centre’s fiscal deficit reached approximately 27% of the budget estimate (BE) during the first four months of FY27. This figure is notably lower than the 31% recorded in the same period last year and aligns with the three-year average of 27%.

• Gross tax revenue growth accelerated to 11% year-on-year in the four months through July.
• This marks an improvement from 4% growth until June and surpasses the 9% growth budgeted for FY27.
• Revenue expenditure remained controlled, increasing by 8% year-on-year, consistent with the budget estimate.
• Capital expenditure saw a significant rise of 30% year-on-year, against the 14% growth budgeted for the full year.

The acceleration in gross tax revenue was largely driven by a recovery in income-tax collections, with indirect tax collections also showing increased momentum. The Centre’s capital expenditure surge was primarily led by investments in Defence, Roads, and Railways.

States’ Current Fiscal Standing

States have maintained a relatively comfortable fiscal position so far, with their fiscal deficit at 22% of the FY27 budget estimate in the first four months. This represents an improvement compared to 28% a year earlier.

• State revenues grew 10% year-on-year during this period, a sharp increase from 3% growth until June.
• Central devolution to states rose by 4%, while states’ own tax revenue grew by 16%.
• Total state spending increased by 5% year-on-year, with revenue expenditure growing 4% and capital expenditure rising 11%.

These figures indicate that states have also managed to keep their overall expenditure under control in the initial months of the fiscal year.

Potential Risks for the Centre

Despite the Centre’s strong performance, certain risks could challenge its ability to meet the FY27 fiscal deficit target. These factors introduce a degree of uncertainty into the long-term outlook.

• A sustained Brent crude price above $90 a barrel could narrow the fiscal cushion, potentially leading to a slippage of around 0.2% of GDP.
• Lower-than-budgeted nominal GDP growth also poses a risk, as the budgeted FY27 nominal GDP level requires approximately 13.5% growth, which may be challenging to achieve.

States’ Looming Fiscal Challenges

The fiscal picture for states is expected to weaken as the year progresses, with several factors contributing to a projected deterioration. This shift could impact their overall financial health.

• While revenue growth might improve in the second half, GST growth is likely to moderate, and central grants could fall below budgeted levels.
• Revenue expenditure is anticipated to remain sticky, and capital expenditure is expected to stay robust.
• Consequently, states’ fiscal deficit is projected to reach 3.3% of GDP in FY27, exceeding their budgeted target of 3.1%.

The Centre appears to be on a stable path towards its fiscal consolidation goals, but states face increasing headwinds that could lead to a modest fiscal slippage by the end of FY27.