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Informist, Monday, May 18, 2026

 

By Priyasmita Dutta

 

NEW DELHI – A lower nominal GDP that will push up fiscal deficit as a percentage of GDP, a slower pace of tax collections, and higher expenditure on subsidies due to the war in West Asia are likely to put the government's finances in a precarious position in 2026-27 (Apr-Mar). In sum, the central government is staring at a net revenue shortfall of over INR 2.5 trillion this financial year, while expenditure could overshoot Budget estimates by at least INR 2 trillion due to higher subsidies on account of oil and fertiliser imports. This is likely to leave a gaping hole of nearly INR 5 trillion in the government's finances – a hole that is unlikely to be filled without significant help from the Reserve Bank of India by way of a higher than budgeted transfer of surplus.

 

The central bank's surplus transfers to the central government, which have been rising year after year, have been a strong source of support to government finances over the last few years. This year, however, the government will be more dependent than ever on Mint Street to ensure the fiscal deficit does not overshoot the target.

 

Given this situation, the RBI's surplus transfer, expected to be a record high once again, is likely to be a saving grace for the government. Economists and market participants expect Mint Street to transfer around INR 2.7 trillion to INR 3 trillion, and this could even rise to over INR 5 trillion if the RBI's central board is willing. A transfer of surplus that is significantly larger than budgeted could invite criticism but seems necessary given the situation. It also seems to be the only way the government can avoid borrowing a far higher amount than the budgeted INR 16.09 trillion.

 

The Budget for FY27 has pegged the government's fiscal deficit at 4.3% of GDP, but the government now sees it at 4.5% of GDP, following a downward revision in the size of GDP for earlier years under the new series of data. In absolute terms, the government has projected FY27 fiscal deficit at INR 16.958 trillion. Looking at the current situation, the government is unlikely to be able to control the fiscal deficit even at 4.5% of GDP. The reasons are the likely shortfall in tax collections, and the ballooning of expenses.

 

TAX TROUBLES

The Budget has projected gross tax collections to rise 8% to INR 44.04 trillion this fiscal year. Of the total tax mop-up, direct tax collections are expected to grow 11% to INR 26.97 trillion. This estimate now looks far-fetched as data released last week showed the government missed the direct tax collection target for FY26 by over INR 810 billion. This means that to meet the FY27 Budget target, direct tax collections will have to rise 15% this year, nearly 4 percentage points higher than the growth assumed in the Budget. 

 

Given the current geopolitical backdrop, expecting 15% growth in direct tax collections would be unrealistic. Assuming direct tax collections grow at the budgeted 11% during the year, these will still be INR 870 billion short of the target, calculations show. If the pace of collections moderates to around 5% in FY27, the same as the growth clocked in FY26, the direct tax receipts shortfall would be over INR 2.4 trillion. Since economic growth is likely to be slower in FY27, lower than budgeted growth in direct tax collections is almost guaranteed.

 

India is facing the worst energy crisis in decades due to the war in West Asia and this has clouded the outlook for growth in FY27. Crude oil prices have risen more than 50% following the closure of the Strait of Hormuz in early March. Nearly half of India's crude and natural gas imports pass through this crucial waterway. 

 

The government has already taken a slew of measures to mitigate the impact of the war. It has cut the excise duty on petrol to INR 3 per litre from INR 13 per litre and that on diesel to zero from INR 10 per litre to help oil marketing companies absorb the rise in crude oil prices. It has also hiked the windfall gains tax on diesel, petrol, and aviation turbine fuel exports to ensure the domestic availability of these fuels is not affected. The net revenue impact of these decisions on the exchequer is estimated at INR 1.65 trillion, according to government officials.

 

The combined likely shortfall in direct tax and excise duty collections will mean the government will face a revenue shortfall of over INR 4 trillion in the ongoing fiscal year. Given that the government shares around 35% of central taxes with states, the net impact of the revenue shortfall on the Centre's budget is likely to be over INR 2.5 trillion. 

 

Even this is a conservative estimate as it does not account for a possible shortfall in collections from the goods and services tax and customs duty. These could also slow down this year owing to lower demand in the economy. The government may also fall short of its capital receipts target of INR 800 billion, given it has met the divestment target only twice in the last decade. And these are the problems on the receipts side alone.

 

HIGHER EXPENSES

In the past, the government has resorted to rationalising expenditure to ensure it stays within the targeted fiscal deficit. That, however, is ruled out this year. On the contrary, expenses are likely to rise sharply in FY27 as the government works to mitigate the impact of the war. The government will have to bear higher fuel and fertiliser subsidies to protect consumers and the economy, and this will likely widen its fiscal deficit. 

 

Earlier this month, Chief Economic Adviser to the Government V. Anantha Nageswaran said "this number (fiscal deficit) will be under challenge" given the rise in crude oil and gas prices. Additional Secretary in the Department of Fertilisers Aparna Sharma has also said India's fertiliser subsidy bill is expected to swell due to a surge in global prices of gas and crude oil.

 

The Budget had estimated expenditure of INR 1.71 trillion on fertiliser subsidy in FY27. If we assume that the government's fertiliser subsidy goes up by as much as the rise in crude oil prices – by 50% - the total outgo on subsidies could touch INR 2.6 trillion, nearly INR 1 trillion higher than the Budget estimate. The government can limit this rise only if it cuts the quantum of fertiliser imports. It is quite likely that the government will use a mix of both these measures – but the end result will still be higher expenditure on fertiliser subsidies.

 

Last week, Sharma had said that the expected demand for fertilisers for the kharif season is 39 million tonnes and against this, the country has over 19.5 million tonnes in stock, which is about 50% of the projected demand. It is not clear whether this means the government will draw down these stocks and import less fertilisers this year. Fertiliser prices are driven by natural gas prices, availability of raw material, and shipping costs. The war in West Asia has curtailed supply sharply and also driven up prices.

 

When it comes to fuel subsidy, state-owned oil companies have so far borne most of the brunt of the increase in prices as they continue to sell fuel at far lower prices than the cost of producing it. Oil Minister Hardeep Singh Puri said oil companies' losses could be over INR 1 trillion in the June quarter and their under-recoveries are expected to surge to INR 2 trillion this quarter.

 

At this rate, oil companies' losses could touch INR 4 trillion for FY27 if the war, or the increase in crude oil prices, persists for a year. Even if we assume the government will compensate oil companies in tranches and allocates only INR 1 trillion for this in FY27, the expenditure budget will surge by that much. Add the two – the increase in fertiliser subsidy and the increase in oil subsidy - and you have a INR 2-trillion hit to the government's expenditure budget.

 

Mounting losses have finally prompted state-owned oil companies to hike fuel prices, albeit just by a little. Oil companies Friday raised pump prices for both petrol and diesel by INR 3 per litre, much lower than market expectations that the increase could be of INR 20-25 per litre.

 

The last time oil companies hiked retail petrol and diesel prices was in April 2022, when Russia invaded Ukraine and crude oil prices rose to record highs. Oil companies had then raised prices of diesel and petrol by a cumulative INR 9.20 per litre in just over two weeks.

 

Given the limited pass-through of price increases this time around, oil marketing companies will continue to bleed, and the government will have to compensate them at least partially as it has done in the past. In FY23, the government gave state-owned oil marketing companies INR 220 billion as partial compensation for their losses of INR 280 billion on account of subsidised sale of LPG under the Ujjwala scheme. In FY26, the government approved INR 300 billion as payments to oil companies for their under-recoveries of INR 410 billion on sales of subsidised LPG. That is still being paid out. Oil marketing companies had supplied LPG cylinders at regulated prices despite higher international prices.

 

In FY27, the government will need to spend a much higher amount to compensate oil companies for their losses.

 

In essence, then, the government is looking at an increase of more than INR 2 trillion in expenses. A revenue shortfall of over INR 2.5 trillion and an increase of INR 2 trillion in expenditure will mean the government will need to finance a nearly INR 5-trillion hole in its budget.

 

SURPLUS SAVIOUR

All of this points to the possibility that the government will likely have to lean on the trusted shoulders of the RBI for a far higher surplus transfer. In the last few financial years, the central bank has transferred record surpluses to the government, which has helped it continue its fiscal consolidation. 

 

The Budget projects the surplus transfer from the RBI and dividends from public sector banks and financial institutions at INR 3.16 trillion, up 3.7% from the revised estimate of INR 3.05 trillion for FY26. In FY26, the RBI transferred a record INR 2.69 trillion as surplus to the government, higher than the INR 2.56 trillion budget estimate for income both from the RBI as well from state-owned banks. The central bank transfers the surplus to the government in May of the subsequent year. The RBI's surplus transfer depends on the Contingent Risk Buffer it sets aside. While the RBI widened this buffer range to 4.5-7.5% last year from 5.5-6.5?rlier, and raised the buffer it maintained to 7.5% last year, it may have to cut the buffer this year to provide a cushion to the government.

 

According to IDFC FIRST Bank Chief Economist Gaura Sen Gupta, the central bank may transfer INR 2.7 trillion to the government for FY26, matching last year's record figure. This is based on the estimate that the RBI will maintain a Contingent Risk Buffer of 7.5% of total assets, the upper end of the range. 

 

In a report, Sen Gupta said the RBI's surplus transfer for FY26 is likely to be supported by interest income on both foreign and rupee securities. Earnings on foreign exchange transactions are expected to be lower as the RBI's gross dollar sales in the first 11 months of the year were only $166 billion, less than half the $399 billion it sold in FY25, the economist said.

 

Considering the government has accounted for a similar high surplus transfer in FY27, as reflected in the Budget estimate, an INR 2.7-trillion transfer may not help mitigate the risks of fiscal slippage. The RBI can transfer a higher surplus to the Centre only by lowering its Contingent Risk Buffer from 7.5%. 

 

The central bank's balance sheet was INR 76.25 trillion at the end of FY25, up 8.2% on year. Assuming it grew 10% in FY26, its balance sheet would have been INR 83.88 trillion at the end of Mar. 31. Every 50-basis-point cut in the Contingent Risk Buffer from 7.5% will add INR 420 billion to the surplus the RBI can transfer to the government.

 

In FY25, the RBI's income was INR 3.383 trillion and its expenses were INR 697 billion, resulting in a surplus of INR 2.69 trillion. After statutory nominal transfers, the surplus available for transfer to the government was INR 2.69 trillion, which the RBI paid out. In FY25, the central bank's income had risen 22% while its expenses had grown 7%. The increase in expenses included a provision of INR 449 billion towards its contingency fund to boost its risk buffer to 7.5% of its balance sheet.

 

The RBI's surplus transfer to the government for FY26 will mainly depend on the surplus available from its operations. Assuming a more modest 15% growth in income in FY26, as income from dollar sales will be sharply down, and the same 7% growth in expenses as in FY25, the RBI could end up with a surplus of INR 3.15 trillion. A drawdown of the risk buffer to 4.5% of the balance sheet could then add between INR 1 trillion and INR 1.5 trillion to the surplus available for transfer to the government, which could then potentially rise to as much as INR 4.5 trillion or more.

 

Alternatively, if the RBI does not make a provision towards the contingency fund in FY26, and lets the risk buffer fall only by that much, it will boost its surplus by almost INR 450 billion which could then be available to transfer to the government. This will take the surplus available to transfer to the government close to INR 3.6 trillion.

 

That said, the RBI would also like to be prudent in fixing the risk buffer given the volatile economic environment. The government, on the other hand, will likely have a strong pitch ready when the RBI's central board of directors meets later this month to approve the transfer of surplus to the government. 

 

The central bank's board is made up of 15 nominees, including Governor Sanjay Malhotra and his four deputies. Department of Economic Affairs Secretary Anuradha Thakur and Department of Financial Services Secretary M. Nagaraju are also part of the RBI's board. The other members on the central board of directors include former deputy comptroller and auditor general of government accounts Revathy Iyer and Mahindra group Chairman Anand Mahindra.

 

If the RBI surplus transfer falls short, the government will be left with only one resort – higher borrowing. The central government has set a gross borrowing target of INR 16.09 trillion for FY27. On a net basis, the government plans to borrow INR 11.73 trillion in the current financial year. 

 

Earlier governments had issued special purpose bonds, called oil bonds, to finance the losses of oil companies and buy the government time. However, Finance Minister Nirmala Sitharaman has been extremely critical of such bonds and has tagged these a "burden" imposed by the earlier government. If she sticks to that thinking, and if the RBI surplus transfer is not enough to bridge the budget gap, the government will have to depend only on market borrowing to fund its deficit, if the need arises.  End

 

US$1 = INR 96.30

 

Edited by Avishek Dutta

 

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