India’s central government is expected to stay firmly on its fiscal consolidation path in the current financial year, supported by higher non-tax revenues and sustained capital spending, even as global growth faces fresh uncertainty from slowing trade and diverging monetary policies, according to a January 2026 Global Economy Update by CareEdge Global.
The report said India’s gross tax revenue growth remained subdued in the first eight months of FY26, rising 3.3 per cent year-on-year, well below the budgeted 12.5 per cent. However, this shortfall is expected to be offset by a sharp rise in non-tax revenues, which grew 20.9 per cent during the period, aided by a higher-than-budgeted dividend transfer from the Reserve Bank of India.
CareEdge Global expects the Centre to meet its fiscal deficit target of 4.4 per cent of gross domestic product in FY26, with the deficit narrowing further to around 4.2–4.3 per cent of GDP in FY27. “Overall, revenue shortfall from slower growth in tax collections is expected to be offset by the RBI’s higher dividend transfer and lower revenue spending,” the report said.
The union government’s fiscal deficit widened to Rs 9.76 lakh crore during the April to November period of the current financial year (8MFY26) from Rs 8.5 trillion in 8MFY2025. Data released by the Controller General of Accounts (CGA) showed that the deficit reached 62.3 per cent of the FY26 budget estimate (BE).
This stemmed from a strong around 28 per cent expansion in the capital expenditure, even as the revenue deficit remained stable as compared to the year-ago levels. On the taxes front, the growth in the GoI’s gross tax revenues (GTR) was restricted at 3.3 per cent year-on-year (YoY) during 8MFY26, amid weak indirect tax collections (0.6 per cent) offsetting the improvement in direct taxes (7.2 per cent), Icra noted in its report.
Total receipts stood at Rs 19.49 lakh crore, while overall expenditure in 8MFY26 was at Rs 29.25 lakh crore. These were 55.7 per cent and 57.8 per cent of the current year’s budget target. Data revealed that revenue receipts were Rs 19.1 lakh crore, while non-tax revenue was Rs 5.16 lakh crore. Tax and non-tax revenues were 49.1 per cent and 88.6 per cent of the budgeted estimate.
Data showed that the revenue deficit was at Rs 3.57 lakh crore or 68.2 per cent of the financial year’s budget target. Icra noted that larger IGST settlements to states on a year-on-year (YoY) basis appear to have dampened the GTR during this period. Given the steep required growth of around 26 per cent in December to March FY26 to meet the target, GTR is expected to undershoot the BE by around Rs 1.5 trillion.
However, the higher-than-budgeted non-tax revenues as well as expenditure savings on the revenue spending front would offset the miss on the taxes side, while also enabling the GoI to enhance its capex allocation slightly over the FY26 BE. Consequently, Icra does not expect a fiscal slippage relative to the FY26 BE of 4.4 per cent of GDP at the current juncture, the report pointed out.
Key Pillar Of India’s Fiscal Strategy
Capital expenditure has remained a key pillar of India’s fiscal strategy, growing 28.2 per cent year-on-year in the first eight months of FY26, even as revenue expenditure growth stayed muted. Non-debt capital receipts are broadly on track to meet full-year targets, assuming stake sales in state-owned entities such as IDBI Bank and LIC during the year, the report added.
CareEdge Global noted that India continues to lead emerging markets in manufacturing momentum, supported by resilient domestic demand and sustained public investment, even as global trade growth shows signs of easing.
At the global level, the report flagged a moderation in merchandise trade growth, which slowed to 3.7 per cent year-on-year in October 2025 from 4.4 per cent in September, reflecting weaker industrial output after a brief rebound. Despite this slowdown, global trade volumes have remained relatively resilient, supported by supply-chain realignments and strong demand linked to artificial intelligence, particularly semiconductors. The global trade environment is expected to remain challenging, the report said, as geopolitical uncertainty and shifting tariff regimes continue to weigh on industrial activity.
In Asia, CareEdge Global flagged rising political risks in Bangladesh, where renewed unrest ahead of February 2026 elections has led to a downward revision in real GDP growth expectations for 2026. CareEdge Global said that while advanced economies such as the US and euro zone are showing pockets of resilience, the global outlook remains uneven, with emerging markets facing a mix of fiscal, political and trade-related headwinds.
Fiscal Deficit Likely To Stay Within Target, Says Icra
India’s fiscal deficit has reached nearly two-thirds of its full-year target in the first eight months of FY2026, driven by a sharp acceleration in capital expenditure, but a breach of the annual deficit goal appears unlikely as expenditure savings and higher non-tax revenues are expected to offset weak tax collections, according to a report by Icra.
To meet the FY2026 budget target of Rs 42.7 trillion in gross tax revenues, collections would need to rise by a steep 26 per cent year-on-year during December–March, a pace Icra said appears unlikely. As a result, the agency expects gross tax revenues to undershoot the budget estimate by around Rs 1.5 trillion, led by sizeable misses in personal income tax and central GST collections.
Despite this shortfall, Icra does not expect a fiscal slippage beyond the budgeted deficit of 4.4 per cent of GDP. The report said higher-than-budgeted non-tax revenues and savings on the revenue expenditure front are likely to compensate for weaker tax inflows, while also allowing the government to marginally exceed its capital spending target.
Icra said savings on revenue expenditure, combined with non-tax revenue overshooting, would provide headroom for the government to sustain elevated capital spending without breaching the fiscal deficit target. Capital expenditure growth is expected to moderate in the final quarter, but the full-year outlay may still slightly exceed the budget estimate of Rs 11.2 trillion.
Goldilocks Economy And Signs Of Strain
According to a report by Systematic Research, India’s much-touted “Goldilocks” economic phase is showing signs of strain, with weak tax buoyancy and narrowing fiscal space creating a policy gridlock. The report said that while headline indicators point to strong growth, the underlying economic momentum remains fragile, leaving policymakers with limited room to manoeuvre.
It noted that recent fiscal and monetary actions appear counterintuitive for an economy officially projected to be in a high-growth, low-inflation phase. “Headline growth masks fragile momentum, leaving the government trapped in a policy dilemma,” the report said. One example cited was the increase in basic excise duty on cigarettes, announced just months after GST rationalisation. The move is expected to generate around Rs 400 billion in additional annual revenue, underscoring the government’s need to shore up fiscal resources despite the broader narrative of economic strength.
On the monetary front, the Reserve Bank of India surprised markets by announcing additional large open market operations (OMOs) worth Rs 2 trillion in government securities, alongside USD 10 billion in USD-INR buy-sell swaps. This followed earlier signals of substantial liquidity support, making the scale and timing of the intervention unusual in what is being described as a “Goldilocks” phase marked by around 8 per cent real GDP growth and near-zero inflation.
The report highlighted that despite this ostensibly benign backdrop, policymakers have rolled out measures typically associated with economic stress. These include cumulative CRR cuts of 150 basis points, repo rate cuts of 125 basis points, liquidity infusion of nearly Rs 8 trillion and fiscal stimulus through GST reductions.
However, financial market indicators suggest these steps have not eased conditions as intended. The 10-year government bond yield has climbed to the 6.6–6.65 per cent range, the rupee has weakened beyond 90 against the US dollar, and system liquidity has slipped back into deficit.
According to Systematic Research, these developments point to rising concerns that aggressive fiscal expansion and liquidity support may be crowding out private sector capital expenditure. With borrowing pressures increasing and fiscal headroom shrinking, the report warned that the recent policy push by both the government and the RBI could further constrain flexibility in the period ahead. |
