The Government of India’s (GoI’s) fiscal deficit eased to Rs. 8.6 trillion or ~55% of the FY2026 BE during 9M FY2026 from Rs. 9.1 trillion (~58% of PE) in the year ago period, after having exceeded the same in 8M FY2026. A healthy expansion in tax revenues, especially corporation tax, customs duty and IGST, along with a YoY contraction in capex led to a fiscal surplus in the month of December 2025.
In 9M FY2026, net tax revenues have grown by a modest 5.2%, non-tax revenues expanded by 20.6% and revenue expenditure rose by a tepid1.8%, whereas capex surged by 15%.
The GoI’s gross tax revenues expanded by a resounding 32% in December 2025, pulling up the YTD growth to 9% during April-December FY2026. Nevertheless, we anticipate a sizeable shortfall in the GoI’s gross tax revenues in the current fiscal relative to the FY2026 BE.
The GoI’s capex contracted for the third consecutive month in December 2025, marking a decline of 23% in Q3 FY2026, which may impact the GDP growth in the quarter. Despite this, capex recorded a healthy rise of 15% YoY during 9M FY2026, amounting to ~70% of the FY2026 BE as against ~65% in the year ago period. Capex needs to contract by ~9% YoY during Q4 FY2026 to remain within the FY2026 BE.
The GoI’s non-interest non-subsidy revex has declined by 4.7% during 9M FY2026; expenditure under this head needs to expand by a substantial 38% during Q4 to meet the FY2026 BE. This appears unlikely and could lead to sizeable savings, which would offset the shortfall on the receipts side. A Rs. 1.5 trillion cut in expenditure on this account would still imply a required growth of ~15% during the last three months, which seems relatively reasonable.
Overall, we expect the potential miss on the taxes side to be offset by higher-than-budgeted non-tax revenues and sizeable expenditure savings on the revenue spending front. As a result, we do not anticipate the FY2026 RE to indicate a higher fiscal deficit than the FY2026 BE.
The cumulative inflows under savings deposit and certificates and PPF surged by 32% YoY to Rs. 2.3 trillion in 9M FY2026 (74% of FY2026 BE) from Rs. 1.7 trillion in 9M FY2025 (51% of FY2025 PA), aided by unchanged interest rates for small savings schemes. Such inflows need to contract by a sharp 53% YoY during Q4 FY2026 to remain within the FY2026 target, which seems highly unlikely, given that the interest rates on small savings schemes were kept unchanged for Q4 FY2026 and these remain elevated relative to G-secs with comparable maturity or spreads higher than the acceptable levels. Even if small savings inflows remain flat during Q4 FY2026 compared to the year-ago levels, this will imply an overshooting to the tune of ~Rs. 0.9 trillion on this account. Amid expectations of unchanged market borrowings vis-à-vis the FY2026 BE, this would likely boost the GoI’s cash balances, that would be carried into the next fiscal to reduce the size of G-sec issuance.
ICRA expects the GoI’s fiscal deficit to be pegged at 4.3% of GDP in FY2027, which would entail a net market borrowing number of Rs. 12.2 trillion, somewhat higher than the FY2026 levels. This, along with a substantial increase in redemptions is set to push up the gross market borrowing number quite sharply to Rs. 16.9 trillion in FY2027 from Rs. 14.6 trillion in FY2026. However, the GoI could pare the gross issuance number by either drawing down cash balances directly or using these to conduct buybacks, resorting to net T-bill issuances, or conducting switches/conversions to reduce the redemption pressure in the next fiscal.
