Walking the fiscal tightrope won’t be easy

Why in the News

Halfway through the financial year, the Union government’s accounts show slower tax growth, a disinvestment windfall, slowing capital spending and a rising subsidy bill. Together, these trends raise the risk of fiscal slippage, meaning a fiscal deficit wider than the 4.3% of gross domestic product (GDP) the Union Budget planned.

What is fiscal slippage, and why is it a risk this year?

1. What it is: The fiscal deficit is the amount the Centre must borrow because its spending exceeds its tax and other non-borrowed income. Slippage means that gap ends up wider than budgeted.
2. Household comparison: It works like a family whose salary rises slower than planned as its grocery bills climb, so it must either borrow more or cut spending.
3. Why it matters: Extra government borrowing competes with private borrowers for the same savings, which can push up interest rates across the economy.
4. The takeaway: Weak revenue on one side and rising subsidies on the other can push borrowing above plan unless the Centre cuts spending.

What does the revenue side show?

1. Subdued tax growth: Gross tax collections grew 6.1% in April to September, marginally below the Budget’s full-year assumption. The Controller General of Accounts (CGA), which compiles the Centre’s accounts, reported it.
2. Direct taxes holding up: Direct taxes grew at a fairly healthy pace, with corporate tax rising faster than personal income tax.
3. Excise drag: Cuts in excise duty on petrol and diesel pulled excise revenue down to Rs 1.07 lakh crore so far, from Rs 1.38 lakh crore a year earlier.
4. Customs offset: Rating agency ICRA expects customs collections, up a strong 16.5% in the first half of FY2027, to partly offset the excise loss.
5. Disinvestment windfall: The Centre has raised Rs 55,757 crore from disinvestment. With its share of the IDBI Bank stake sale, the Rs 80,000 crore target is likely to be surpassed.

What does the spending side show, and how large could the slippage be?

1. Capital spending slows: Capital expenditure (spending on assets such as roads and railways) grew 23.7% in the first quarter but only 2.8% in the second.
2. Fertiliser subsidy overshoot: CareEdge Ratings expects the fertiliser subsidy bill to exceed Budget estimates, rising to Rs 2.5-2.7 trillion.
3. CareEdge deficit estimate: The agency expects the fiscal deficit to land between the Budget target and 4.5% of GDP, so the target is met at best.
4. SBI estimate: State Bank of India (SBI) economists expect the deficit to be Rs 1.2 lakh crore higher, driven by excise cuts and higher fertiliser, petroleum and liquefied petroleum gas (LPG) subsidies.
5. Spending cuts likely: This arithmetic raises the possibility of expenditure rationalisation, meaning cuts or deferrals in planned spending, in the coming months.

Challenges

1. Revenue given up on fuel: Excise cuts lower pump prices but remove a large, steady source of central revenue.
2. Capital spending as easy cut: Capital spending is often cut first when deficits widen, because salaries and interest are legally committed and it is not.
3. Price-linked subsidies: Fertiliser and LPG subsidy bills rise with global prices, so the Centre cannot fix them in advance.
4. One-off receipts: Disinvestment proceeds come once, so they cannot fund recurring spending such as subsidies.

Way Forward

1. Protect capital spending: The Finance Ministry should rationalise revenue expenditure first and keep capital expenditure on its Budget path.
2. Better-targeted subsidies: Deliver fertiliser and LPG subsidies to identified beneficiaries to slow the growth of the bill.
3. Windfall to cut borrowing: Use surplus disinvestment receipts to reduce borrowing, not to fund new recurring spending.

Conclusion

Weak excise revenue and rising subsidies are pressing on a deficit target that a one-time disinvestment gain cannot fully protect. What the Centre trims in the second half, and whether capital spending is spared, will decide if the fiscal target holds.

Key numbers

1. Asset monetisation: Rs 6,366 crore raised so far this year, in addition to disinvestment.
2. IDBI Bank sale: Fairfax Financial Holdings selected as buyer of a 60.72% stake for Rs 52,878 crore.

Matching Previous Year Question

“[2025] Consider the following statements: I. Capital receipts create a liability or cause a reduction in the assets of the Government. II. Borrowings and disinvestment are capital receipts. III. Interest received on loans creates a liability of the Government. Which of the statements given above are correct? (a) I and II only (b) II and III only (c) I and III only (d) I, II and III ANSWER: (a)”