FY26 fiscal deficit hits 4.4% target despite subsidies

Deficit target met amid tougher fiscal arithmetic

India contained its fiscal deficit at the budgeted 4.4% of GDP in FY26, even as higher subsidies and weaker receipts complicated the Centre’s fiscal math. Provisional data analysed by ICRA put the FY26 fiscal deficit at ₹15.2 trillion. Official data reported the deficit at ₹15.19 trillion, below the revised estimate (RE) of ₹15.58 trillion. The achievement matters because FY26 marked the government’s post-pandemic fiscal consolidation milestone, with the deficit cap set at 4.4% of GDP. The deficit outcome also came despite a downward revision in nominal GDP under a new series, which can make deficit ratios harder to manage.

What helped the Centre stay within 4.4% of GDP

ICRA attributed the FY26 outcome to expenditure compression and higher miscellaneous capital receipts. Aditi Nayar, chief economist at ICRA, said the fiscal deficit trailed the RE by ₹0.4 trillion, helped by a ₹0.6 trillion cut in expenditure that more than offset a marginal miss on receipts. Separately, CGA data showed total expenditure was trimmed by around ₹0.59691 trillion from its RE level to about ₹49 trillion. This spending restraint helped offset pressure from higher subsidy payments and interest outgo. The government also reduced net market borrowing, a move officials and market participants often watch for its impact on bond supply.

Spending profile: revenue expenditure firm, capex below target

On the expenditure side, total spending rose 5.4% year-on-year to ₹49.1 trillion in FY26, but remained below the government’s revised estimate. Revenue expenditure increased amid higher subsidy payments and interest costs. Capital expenditure rose marginally to ₹10.7 trillion, but stayed below target. Official figures showed capital expenditure at ₹10.69 trillion against an RE of ₹10.96 trillion, while capital and revenue spending were 97.6% and 99.1% of their respective targets. The mix highlights a trade-off: fiscal control was achieved, but with limited headroom for development spending in the final tally.

Receipts: net taxes near target, non-tax above, but overall shortfall

Receipts were uneven. Net tax receipts touched ₹26.23 trillion in FY26, or 98.1% of the target. Non-tax revenue came in at ₹6.79 trillion, above the goal of ₹6.68 trillion. Even so, CGA data indicated a dip in total receipts of ₹0.20368 trillion from the RE level of ₹34 trillion, driven by a shortfall in revenue receipts. The shortfall was linked to reforms in personal income tax and goods and services tax (GST). One analysis also highlighted a gross tax buoyancy of 0.7 in FY26 following these changes, underscoring why receipts growth did not fully match expenditure pressures.

West Asia war pressure: fertiliser subsidy jumps

One of the biggest FY26 pressures linked to the West Asia conflict was the fertiliser subsidy bill. With just one month of the war’s impact, the government’s FY26 subsidy bill reached 113% of the revised estimate, complicating budget calculations. The fertiliser subsidy was reported at ₹2.1 trillion, the highest since the initial impact of the Ukraine war in FY23. The data underlined India’s exposure to global fertiliser prices and the fiscal burden involved in shielding farmers from sharp price swings.

Borrowing mix: lower market borrowing, higher small savings

Funding patterns also shifted. The Centre trimmed net market borrowing to ₹10.06 trillion in FY26 from the RE of ₹10.40 trillion, a step that was described as likely intended to soothe the bond market. At the same time, it raised its offtake from the National Small Savings Fund (NSSF) to ₹4.86 trillion against the RE of ₹3.72 trillion. These channels, together with other receipts, largely finance the fiscal deficit. The combination suggests the government balanced deficit funding while managing borrowing costs and market absorption capacity.

Interest and subsidies remained heavy items in revenue spending

Monthly fiscal data showed why revenue expenditure is hard to compress quickly. During April to February of FY2026, the fiscal deficit was ₹12.5 trillion, or 80.4% of the full-year FY26 level, compared with ₹13.5 trillion, or 86% of the actual in the year-ago period. Interest payments alone accounted for more than 26% of spending at ₹10.65 trillion. Major subsidies during the period were ₹3.89 trillion. A mere 1% growth in revenue expenditure during April to February helped keep the deficit in check, even as capex grew 15% year-on-year in that window.

Supplementary grants and subsidy assurances in Parliament

In Parliament, Union finance minister Nirmala Sitharaman told the Lok Sabha that the Centre would meet its revised fiscal deficit target despite higher subsidies and defence outlays. The government sought approval for about ₹2 trillion in net additional spending through supplementary demands for grants. Sitharaman said over ₹0.5738184 trillion of additional spending was earmarked for an Economic Stabilisation Fund, and noted the total size of the fund was ₹1 trillion, with the remainder to be met through savings. On fertiliser support, she said there would be no shortage, and that an extra ₹0.1923 trillion was being provided in supplementary demands. For the PM Garib Kalyan Ann Yojana, an additional ₹0.23641 trillion was provided under the food grain subsidy scheme.

Key numbers snapshot

Why the FY26 outcome still raises policy questions

The FY26 deficit number shows fiscal consolidation stayed on track even under global headwinds, including subsidy stress linked to geopolitical shocks. But the composition of adjustment matters for growth and inter-governmental finances. One assessment argued that the Centre met its deficit promise not through revenue strength, but by cutting transfers and development spending, shifting stress to states. It cited a shortfall of ₹1.63 trillion in the Centre’s net tax revenue and indicated that the transfer to states for creation of assets was estimated at ₹3.08 trillion. Separately, economists flagged that while capital expenditure growth moderated to 1.6% in FY26, capex remained a key support for infrastructure creation, with average capex growth of 25.9% during FY22 to FY25.

Conclusion: consolidation achieved, next target may be harder

FY26 ended with the Centre meeting its 4.4% of GDP fiscal deficit target at about ₹15.2 trillion, despite a sharp fertiliser subsidy bill and softer receipts. The gap was closed through expenditure restraint, higher miscellaneous capital receipts, and adjustments in the borrowing mix. Looking ahead, the fiscal challenge remains sensitive to subsidy demands, with one note cautioning that meeting a 4.3% deficit target in the current financial year could be tougher if the West Asia crisis pushes up food, fertiliser and fuel subsidies.