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India is likely to meet its FY26 fiscal deficit target of 4.4 per cent of GDP and may even perform better, according to PwC. Despite the National Statistical Office revising nominal GDP growth estimates downward, PwC said the overall GDP base remains aligned with Budget assumptions, keeping fiscal calculations stable. The government's recent track record of beating deficit targets adds confidence to this outlook. While lower nominal growth may impact tax collections, savings in revenue expenditure and buffers from GST compensation funds are expected to offset the gap. Capital spending is likely to remain on track, supporting infrastructure-led growth. A stable fiscal position is seen as a positive signal for global investors and key sectors such as housing and real estate.
India is likely to meet its fiscal deficit target of 4.4 per cent of gross domestic product (GDP) for the 2025-26 financial year and may even perform better than the target, according to PwC. The outlook is seen as a positive signal for global investors, reflecting the government's continued focus on fiscal discipline. Advertisement
Ranen Banerjee, Partner and Leader, Economic Advisory Services at PwC, said concerns had emerged after the National Statistical Office (NSO) revised the nominal GDP growth estimate for FY26 to 8 per cent from an earlier projection of 10.1 per cent. A lower nominal growth rate typically raises questions about the government's ability to meet deficit targets, as fiscal ratios are calculated against GDP.
However, Banerjee said that despite the downward revision in the growth rate, the absolute nominal GDP numbers remain largely in line with the Budget estimates. This means the base used to calculate the fiscal deficit has not materially weakened, allowing the government sufficient room to achieve the targeted 4.4 per cent deficit.
The government has a recent track record of outperforming its fiscal targets. In FY25, the fiscal deficit was contained at 4.8 per cent of GDP, better than the revised estimate of 4.9 per cent. According to Banerjee, this trend suggests there is scope to outperform again in FY26.
He said the fiscal deficit could even be reported at around 4.3 per cent of GDP, which would send a strong message that India is not only adhering to its fiscal consolidation roadmap but also exceeding stated targets. Such an outcome would strengthen investor confidence at a time when global markets remain cautious.
Finance Minister Nirmala Sitharaman had pegged the FY26 fiscal deficit at INR 15.69 lakh crore, or 4.4 per cent of GDP, in the Union Budget presented last year.
Banerjee explained that the NSO's revision in nominal GDP growth reflects softer wholesale price trends, particularly in food and energy. Lower inflation has reduced the GDP deflator, narrowing the gap between real and nominal GDP growth. While this is positive from a price stability perspective, it does have implications for tax collections.
According to PwC estimates, the lower nominal growth could result in a shortfall of about INR 1.9 trillion in gross tax revenues. After adjusting for GST compensation cess, the effective revenue shortfall may be closer to INR 0.75 trillion. However, the central government is expected to have a buffer of around INR 0.5 trillion from unutilised GST compensation cess funds, which can help absorb part of the impact.
On the expenditure side, Banerjee said revenue expenditure is likely to be around 2 per cent lower than Budget estimates. Capital expenditure, which has been a key driver of infrastructure creation and economic activity, is expected to remain close to 100 per cent of the budgeted level.
With savings on the expenditure side offsetting potential revenue gaps, PwC expects the fiscal deficit target for FY26 to remain well within reach. A stable fiscal outlook, supported by continued public investment, is seen as important for sustaining economic growth and supporting sectors such as infrastructure, housing, and real estate.
Source: PTI
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