A small fiscal slippage is not a calamity | Photo Credit: Deepak Verma

Owing to global headwinds, the fiscal deficit target of 4.3 per cent of GDP may be breached in FY27. But that should not be a cause for worry. Both, US and Iran have ratcheted up hostilities, just as it seemed that oil prices were moving back to pre-war levels and ships had begun to move across the Strait of Hormuz. In addition, if the monsoon does not hold up (there has happily been a sharp improvement over June this month) there could be further adverse impact on inflation and growth. To be sure, this looks like a worst case scenario, and even if one of these variables turns favourable the outlook will improve. But the Centre and States need to be prepared. This implies spending more to protect vulnerable groups and shore up demand, as the Centre has indeed sought to do by creating the ₹1 lakh crore Economic Stabilisation Fund in March.

It is worth noting here that a small fiscal slippage should not be seen as a calamity. India has a proven record of bouncing back to its fiscal trend path after loosening its purse strings in times of adversity. Today, monetary and fiscal authorities are faced with the task of dealing deftly with falling growth and rising inflation. The Reserve Bank of India, in June, pegged growth this year at just 6.6 per cent (down from 6.9 per cent in April), while expecting inflation to rise to 5.1 per cent from 4.6 per cent. With interest rates rising globally, the Centre cannot borrow without restraint to meet rising expenditure needs. Its finances for this year so far are indicative. As reported recently by this newspaper, the fiscal deficit in April-May was ₹1.62 lakh crore, against just ₹13,163 crore in the same period in FY26. Revenue expenditure was up 20 per cent at over ₹60,000 crore, led by a 47 per cent rise in fuel and fertilizer subsidy outgo. Total receipts were down 2 per cent at about ₹70,000 crore. The outgo on urea was a fourth of the annual budget (₹1.71 lakh crore for FY27). This is inevitable.

Even if global headwinds actually recede, the supply chains may take time to bounce back. While persisting with the capex push, the Centre should ensure that outlays on VB-GRAM-G are well utilised. The States need some leeway in spending in such a situation. Food subsidies may top the revised estimates of ₹2.28 lakh crore for FY26. The Budget’s plan to save ₹17,000 crore in fertilizer and food subsidy has come unstuck.

Fiscal consolidation has been achieved by curbing primary deficit (fiscal deficit minus interest payments) from 1.4 per cent of GDP in FY25 to 0.8 per cent in FY26 and a projected 0.7 per cent in FY27. The revenue deficit has dropped marginally as a share of GDP, indicating that the axe may have fallen on development expenditure. This should be looked into. With interest payments at 40 per cent of revenue receipts, the government needs to relook at non-debt options to raise funds — such as disinvestment. Revenues forgone which have not yielded results should be reviewed. A gentle reset is called for.

Published on July 10, 2026