A massive tax shortfall and slower growth loom, but the Centre's budget math still works
The government has managed to diversify its revenue sources, which will insulate it against massive tax shortfalls in FY26. Budget 2026 can continue to aim for a lower fiscal deficit figure in FY27.
The budget is around the corner, and the government is staring at a massive tax shortfall. To make matters worse, nominal GDP growth has been slower than what was anticipated earlier in 2025-26.
However, neither of these two will put the government in an uncomfortable position, as non-tax revenues have exceeded expectations, and the fiscal deficit calculation will benefit from statistical revisions.
The government’s tax collections have grown only 3.3% in April-November, sharply lower than the 10.8% growth aimed for in the budget. A number of factors will lead to the shortfall: an optimistic income tax projection (13.1% growth projected in the Budget) despite massive revisions, slow corporate tax collections due to declining nominal GDP, and the revenue hit from cuts in goods and services tax (GST) that was not accounted for in the budget last year.
Economists expect this could lead to a tax shortfall of ₹1.5-2 trillion in FY26. Simply put, it means 0.3% of fiscal slippage.
The good news is that the government has managed to diversify its revenue source: dividends and profits transferred by the public sector have been robust this year as well. By November, they were already 104% of the Budget estimates, totalling ₹3.4 trillion.
Additionally, disinvestment receipts have made a comeback after struggling for the past two years. The government has already received ₹23,717 crore in disinvestment receipts by November, which has already exceeded the full-year figures of around ₹8,900 crore in the past two years, and seems to be on track to meet the annual target of ₹47,000 crore in the remaining four months.
“The RBI dividend has been a source of support," said Kanika Pasricha, chief economic advisor at Union Bank of India. “Disinvestment numbers have performed well this year due to asset sales/monetisation by the government," she added.
Growth factor
An important aspect of government fiscal math is GDP growth. Fiscal deficit aim is set as a percentage of GDP, which means fiscal deficit goes up when GDP falls short and down when GDP exceeds expectations. The government had projected 10.1% nominal GDP growth rate for FY26 in the last budget.
First advance estimate of GDP released by the statistics ministry on Wednesday pegged the full-year nominal GDP growth at 8.0%. However, this does not automatically mean a fiscal slippage.
In absolute terms, the budget projected nominal GDP to be ₹356.98 trillion. The first advance estimate puts it at ₹357.14 trillion. "This rules out a beat or a miss in the fiscal deficit to GDP ratio on account of the denominator," said Rahul Agrawal, senior economist, Icra.
This has come against the backdrop of a larger base—FY25 GDP was revised upwards to ₹325.62 trillion from ₹324.11 trillion. This made the budget aim achievable even with slower growth.
Fiscal trajectory
Economists expect the Centre to meet its fiscal deficit target of 4.4% of GDP in FY26, with the possibility of some expenditure cuts towards the end of the year.
The government has maintained the pace of its capital expenditure so far, delivering ₹6.58 trillion in April-November, achieving 58.7% of the Budget estimate.
“We still think the Centre could scrape through and meet the fiscal target this year, despite massive tax revenues slippage. Robust RBI and PSU transfers and cuts in non-core capex and miscellaneous revenue expenditure could help offset the taxation miss," said Madhavi Arora, chief economist at Emkay Global.
Going forward, the government will not directly aim for a fiscal deficit figure in the upcoming Budget for FY27. It will instead aim for a lower debt-to-GDP ratio, which will form the basis for the fiscal deficit for the next financial year.
This will be a technical shift, and the fiscal consolidation path is likely to continue in the next financial year. Fiscal deficit expected to be 4.0-4.2% of GDP, according to Goldman Sachs.
There are several factors that will aid the lower debt or lower fiscal deficit as percentage of GDP, economists said. First, nominal GDP growth is expected to be higher as inflation is expected to rise to around 4%. Second, dividends and disinvestments are expected to remain strong even next year.
The tax shortfall this year may, however, prompt the government to opt for a conservative estimate for next year, especially since signals for a sustainable uptick in consumption are not yet visible. While non-tax revenues are expected to keep government finances comfortable going into the next financial year, a consumption boost, stronger growth, and broadening of the tax base will be key to faster consolidation or larger outlays for schemes.
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