Low tax growth didn’t derail India’s finances in H1FY26. Here’s why
The Centre’s tax collections have been weak this year, putting budget estimates in doubt even before the impact of recent GST cuts sets in. Yet, it has managed to stay on course with its capex commitments.
Despite muted tax growth in the first half of FY26, the Centre has managed to keep its finances on track, thanks largely to windfall dividends from the Reserve Bank of India (RBI) and other state-owned entities. The additional revenue cushion helped contain the fiscal deficit at just 36.5% of the budget aim in April-September.
The outcome is telling. Sluggish tax growth usually squeezes a government’s spending ability, but this year’s data suggest otherwise.
Revenue slump
Gross tax revenue grew a muted 2.8% during the first half of current fiscal year (H1FY26), well below the 11% full-year growth projected in the Union Budget.
The slowdown was driven by tepid income-tax growth of 4.7% as against the budgeted 13.1%, anaemic corporate-tax growth of 1.1% (vs budgeted 10.4%), and modest central goods and services tax (CGST) growth of 5.8% (vs budgeted 10.9%).
Additionally, the Budget’s big bet on securities transaction tax (STT) collections did not materialize amid muted trade volumes and choppy markets. STT collections rose only 0.6% in the first half, compared with the targeted growth of 41.8%.
Dividend boost
Even so, the Centre managed to keep its capital expenditure commitment on track, reaching slightly above the halfway mark by September.
Capital expenditure stood at ₹5.8 trillion in April-September, 40% higher year-on-year, helped by a low base last year when spending was curtailed due to the general elections.
According to Aditi Nayar, chief economist at rating agency Icra Ltd, the robust capex in H1, unusual for the period, which typically sees a slow pickup, means capex could contract 15% in the second half and still meet the budget target.
Revenue expenditure, in contrast, grew only 1.5% year-on-year during the same period, helping keep overall expenditure in check.
The biggest cushion came from dividends and profits, which stood at ₹3.5 trillion against the budgeted ₹3.2 trillion. Of this, the Reserve Bank of India’s (RBI) windfall dividend payout of ₹2.56 trillion provided crucial fiscal support. In recent years, the government has increasingly relied on large RBI dividends to offset shortfalls in tax revenue and keep its fiscal position steady.
Risks remain
While the Centre’s finances appear on track so far, risks are emerging. The estimated revenue foregone of around ₹50,000 crore due to Goods and Services Tax (GST) cuts, effective 22 September, will make tax collections more tepid in the months ahead. Faltering nominal GDP growth also poses a challenge. In the first quarter of the current fiscal year, GDP grew 8.8%, slower than 10.8% in the preceding quarter.
The Budget projected a nominal GDP of ₹356.98 trillion, implying a growth rate of about 8% over ₹330.68 trillion recorded in FY25. Some economists have warned that nominal GDP growth could slip below the 8% mark—putting the government’s fiscal math at risk, Mint reported on 31 August.
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