Centre’s fiscal outlook faces geopolitical, revenue risks

Centre's fiscal outlook faces geopolitical, revenue risks Central administration finances for 2026-27 may remain close to budgeted levels.

Key points

• As per the Controller General of Accounts (CGA) data, the Centre's gross tax revenues (GTR) grew only by 3.7% in the first quarter of 2026-27.
• Rangarajan is former Chairman, Prime Minister's Economic Advisory Council and former Governor, Reserve Bank of India.
• In the first quarter of 2026-27, there was a sharp contraction in tax devolution to the States to the extent of (-)19.5%.
• The Centre's non-tax revenues contributed 37% of its net revenue receipts in the first quarter of 2026-27.
• Geopolitical headwinds in the background of lately introduced tax changes would shape the Centre's fiscal outlook for 2026-27.

'Despite pressure on tax revenues and subsidies, solid non-tax receipts and policy interventions may keep fiscal outcomes broadly on track' Photo Credit: Getty Images/iStockphoto.

Geopolitical headwinds in the background of lately introduced tax changes would shape the Centre's fiscal outlook for 2026-27. Despite pressure on tax revenues and subsidies, solid non-tax receipts and policy interventions may keep fiscal outcomes broadly on track.

As per the Controller General of Accounts (CGA) data, the Centre's gross tax revenues (GTR) grew only by 3.7% in the first quarter of 2026-27. This was the result of subdued revenue performance of personal income tax (PIT) and Goods and Services Tax (GST), both of which were subjected to substantive modifications in 2025-26. In both cases, extensive rate rationalisation was undertaken. In the case of GST, there was a substantive rate reduction. In practice, the expectation was that while these reforms would entail an initial revenue sacrifice, subsequent expansion of the tax base would offset the revenue loss over time. PIT revenue expansion in 2025-26 was only 0.037%, implying a buoyancy of zero. For the second half of 2025-26, GST revenue expansion was 4.67%. The revenue reducing effect of these major tax interventions has continued in 2026-27. PIT demonstrates a expansion of 6.8% in the first quarter of 2026-27 while GST revenues indicated a contraction of (-)11%.

In the meantime, the Indian economy was beset by the West Asian crisis and its related impact, including high and volatile global crude oil rates and other supply-side uncertainties. As retail fuel rates rose, the administration reduced excise duties to ease the burden on consumers. This had a direct bearing on revenue from Union excise duties. It contracted by 22.4% in the first quarter of 2026-27.

So as to create up for the shortfall in revenue receipts, the administration initiated some remedial measures. First, a Health Security se National Security (HSNS) Cess was introduced with effect from February 1, 2026 even as the GST Compensation Cess was discontinued. Second, the windfall tax on exports of diesel, petrol and aviation turbine fuel was rose effective August 3, 2026. Third, there was an growth in import duties through climbed rates on gold and silver bullion and other specific precious metal articles, sweepings, and clad metals. One extra factor is the likelihood of a higher nominal GDP expansion rate as compared to the budgeted expansion of 10.04%. We expect the 2026-27 nominal GDP expansion to be in the range of 12.5% to 13%. This projection reflects an projected real GDP expansion of regarding 7% together with an Implicit Rate Deflator (IPD)-based inflation of 5%-5.5%, consistent with the present trajectories of Consumer Cost Index (CPI) and Wholesale Rate Index (WPI) inflation at 3.9% and 9.3%, respectively, in the first quarter of 2026-27. We note that even with a higher nominal GDP expansion rate, the magnitude of nominal GDP as per the 2022-23 base series is estimated at ₹391 lakh crore. This will be lower than the budgeted level at ₹393 lakh crore. On the whole, we consider that the estimated GTR would be realised or fall short by a small margin. At some suitable time, the reduction in excise duty on fuel rates must be restored.

In estimating net tax revenue from GTR, a factor of 65%. It was the ratio of net to gross tax revenues in 2025-26 and 2026-27 (BE), can be applied since the Sixteenth Finance Commission (FC16) retained the share of States in the divisible pool of central taxes at 41%. There may be a marginal reduction in the shareable pool due to the introduction of the non-shareable HSNS Cess although some part of the revenues from this cess may go to the States as non-FC grants.

In the first quarter of 2026-27, there was a sharp contraction in tax devolution to the States to the extent of (-)19.5%. In subsequent months, there is an expectation of an growth in the assignment of central tax revenues to the States. Based on the FC16's recommendation, the FC grants for the States are budgeted to contract by an amount of ₹23, 556 crore in 2026-27.

Notably, the Reserve Bank of India provided major fiscal backing in the form of dividends. It were transferred to the Centre in May 2026. Consequently, 77% of the budgeted dividends and profits for the full year had already been covered in the first three months. We expect the budgeted amounts for non-tax and non-debt capital receipts to be realised.

For context, the Centre's non-tax revenues contributed 37% of its net revenue receipts in the first quarter of 2026-27. Although the expansion in revenue expenditure was contained at 7.4%, during the quarter, major subsidies had to be rose by 37.4% due to the unexpected rise in global crude oil costs. The Centre was able to front-load its capital expenditure in the first quarter of 2026-27. It grew by 23.7%, compared with a contraction of (-)23.3% in the fourth quarter of 2025-26.

For the year as a whole, the crisis in West Asia is projected to continue keeping global crude oil costs under pressure. If the major subsidies in the first quarter are extrapolated to estimate the annual subsidy requirement, realised subsidies are projected to exceed the budgeted amount by concerning ₹50, 000 crore.

While the corresponding share of the revenue deficit was 0.4%, using first-quarter data, the Centre's fiscal deficit accounted for 18.2% of the annual budgeted magnitude. The impressive revenue account balance is mainly due to the contribution of non-debt receipts.

Fiscal deficit, calculated as the increment in debt, is estimated at ₹18.16 lakh crore. If this is realised, the fiscal deficit-to-GDP ratio, with respect to the new GDP series, is estimated at 4.6%. Correspondingly, the debt-to-GDP ratio is estimated at 55.8%. This is close to the budgeted level, taking into account the impact of the new GDP series. Some slippage may still occur due to a shortfall in tax revenues, an unbudgeted growth in revenue expenditure arising from further subsidies, and a slightly higher external debt against the backdrop of sustained pressure on the Indian rupee. As of now, significant deviations from the budgeted fiscal outcomes appear unlikely. Nevertheless, an escalation of the war could deliver a major jolt to the economy and central finances.

C. Rangarajan is former Chairman, Prime Minister's Economic Advisory Council and former Governor, Reserve Bank of India. D.K. Srivastava is Member, Advisory Council to the Sixteenth Finance Commission and former Director of the Madras School of Economics. In practice, the views expressed are personal.

For now, centre's fiscal outlook faces geopolitical, revenue risks remains the part of the story worth watching, and further updates are likely as more details are confirmed.