Clipped from: https://www.thehindubusinessline.com/opinion/editorial/fiscal-squeeze/article70436786.ece
Revenue growth is low but deficit targets may be met
Tax revenues are likely to dip this fiscal | Photo Credit: Andrii Yalanskyi
It is likely to be a stretch for the Centre in meeting its fiscal targets this year. There are a few options that it can exercise, though. Basically, the developing shortfall in direct and indirect tax collections may constrain the Centre’s ability to spend freely. Meanwhile, the committed expenditures include interest payment, defence, subsidies and direct benefit transfers. An increase in non-tax revenues could help in ensuring that there is no major deviation from the budgeted fiscal deficit of 4.4 per cent of GDP.
Advance tax collections reported up to December 17, indicate that direct tax collections are going to be underwhelming in FY26. While collections for corporate tax recorded 8 per cent growth, income tax collections declined 6.5 per cent, resulting in overall growth in direct taxes of 4.2 per cent. The decline in income tax collections is not surprising given the large reductions in rates across tax slabs, announced in the Union Budget for FY26. But this will weigh on the total tax revenue since income tax revenue comprises 56 per cent of direct tax revenue and is budgeted to grow at a higher rate of 14.4 per cent in FY26, compared to the 10.1 per cent growth pencilled for corporate tax revenue. It appears improbable that the collections will revive in the rest of the year. The news on the indirect tax front is not too good either, going by the provisional numbers available for April-October 2025. CGST, which accounts for almost 68 per cent of indirect tax collections is also decelerating, CGST collections have grown 5.7 per cent this fiscal year; well below the budgeted growth rate of 11.1 per cent. The reduction in GST rates from September will impact the collections further.
But there are several reasons why the Centre can still keep the deficit under check. One, the non-tax revenue has been quite strong between April and October this fiscal year, achieving 84 per cent of the budgeted amount. The RBI has paid ₹2.68 lakh crore as dividend for FY25 which is higher than the budgeted sum. Two, strong profit growth among CPSEs has resulted in dividend payouts of ₹43,638 crore from these enterprises so far, at 63 per cent of budget target. While disinvestment proceeds were not included in the Budget, the Centre has already raised ₹8,768 crore through minority stake sales. If the strategic sale of IDBI is completed this fiscal year, it can add to the Centre’s capital receipts. Three, with the Centre front-loading its capex in the first half, there will be lower outgo in the rest of the fiscal year. Four, a possible reduction in outgo on schemes such as the rural employment scheme will also help in supporting the fisc.
The Centre cannot afford to move away from the path of fiscal prudence as interest expense, at ₹12.76 lakh crore for FY26, accounts for one-fourth of Budget expenditure and crowds out other productive spends. It will have to bring down debt as a percentage of GDP to bolster a nervous bond market.
Published on December 26, 2025
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