NewsStocksBudget 2026: Government Expected to Meet 4.4% Fiscal Deficit Target Despite Tax ShortfallsBudget 2026: Government Expected to Meet 4.4% Fiscal Deficit Target Despite Tax Shortfalls
ANZ Research projects India will meet its FY26 fiscal deficit target of 4.4% GDP through expenditure rationalization and central bank dividend support, despite expected tax revenue shortfalls from declining buoyancy. FY27 presents tighter consolidation requirements with an anticipated 4.2% deficit target, necessitating 20 basis points expenditure reduction as the government transitions to debt targeting at 55% GDP.
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India's central government is well-positioned to achieve its fiscal deficit target of 4.4% of GDP for FY26 despite facing revenue challenges, according to recent analysis from ANZ Research. The assessment comes as the government prepares for the upcoming Budget session amid evolving fiscal dynamics.
FY26 Fiscal Deficit Outlook
Dhiraj Nim, Economist and FX Strategist at ANZ Research, expressed confidence in the government's ability to meet its fiscal consolidation goals. In an exclusive interview with NDTV Profit on January 13, he outlined the key factors supporting this projection.
"A mildly lower fiscal deficit ratio can deliver the desired debt-to-GDP ratio. The key expectation from the upcoming Budget session is that the government would be able to meet fiscal deficit target of 4.4% of GDP for FY26," Nim stated.
The analysis indicates that strong real GDP growth will provide a favorable backdrop for fiscal management, allowing the government to maintain its consolidation path without aggressive spending cuts.
Revenue Challenges and Mitigation Strategies
Despite the positive outlook, the government faces significant revenue headwinds. Nim expects a substantial net tax shortfall due to an unexpected decline in tax buoyancy throughout the year.
| Challenge: | Mitigation Strategy |
|---|---|
| Tax Revenue Shortfall: | Large central bank dividend |
| Expenditure Pressure: | Rationalization of capex and non-interest revenue expenditure |
| Borrowing Program: | Maintain current gross and net borrowing levels |
"Thanks to the large central bank dividend and some expenditure rationalisation both on account of capex and non interest revenue expenditure, the government would be able to just meet its fiscal deficit target," Nim explained. This approach will be implemented without disrupting the broader borrowing program.
Non-tax revenues are expected to provide additional support, with projections suggesting they could exceed budget estimates by 0.20% of GDP. Excess central bank dividends will remain a crucial revenue source, while weak oil prices are anticipated to generate higher dividends from oil marketing companies.
FY27 Fiscal Consolidation Framework
Looking ahead to FY27, the fiscal landscape presents tighter constraints. Nim emphasizes the importance of conservative tax assumptions in budget planning for the coming fiscal year.
| Parameter: | FY27 Projection |
|---|---|
| Expected Fiscal Deficit Target: | 4.20% of GDP |
| Required Expenditure Reduction: | 20 basis points of GDP |
| Debt Targeting Approach: | 55% of GDP |
The FY27 fiscal deficit target represents an 'endogenous' target as the government transitions from traditional fiscal deficit targeting to a debt targeting framework. Under this new approach, the government may target debt at 55% of GDP.
"Even if the RBI dividends remain quite large, the government will have to reduce its expenditure by 20 bps of GDP to meet its fiscal deficit target which we expect to be 4.2% of GDP," the economist noted.
Strategic Fiscal Transition
The analysis suggests that India's fiscal consolidation strategy reflects a measured approach to debt management. The economic outlook for FY27 and the debt targeting methodology indicate that aggressive fiscal tightening may not be necessary to achieve desired debt sustainability metrics.
The transition to debt targeting represents a significant shift in fiscal policy framework, potentially providing greater flexibility in managing short-term fiscal variations while maintaining long-term debt sustainability objectives.
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