Geopolitical headwinds in the background of recently introduced tax changes would shape the Centre’s fiscal outlook for 2026-27. Despite pressure on tax revenues and subsidies, strong non-tax receipts and policy interventions may keep fiscal outcomes broadly on track.
Centre’s revenue receipts
As per the Controller General of Accounts (CGA) data, the Centre’s gross tax revenues (GTR) grew only by 3.7% in the first quarter of 2026-27. This was the result of subdued revenue performance of personal income tax (PIT) and Goods and Services Tax (GST), both of which were subjected to substantive modifications in 2025-26. In both cases, extensive rate rationalisation was undertaken. In the case of GST, there was a substantive rate reduction. The expectation was that while these reforms would entail an initial revenue sacrifice, subsequent expansion of the tax base would offset the revenue loss over time. PIT revenue growth in 2025-26 was only 0.037%, implying a buoyancy of zero. For the second half of 2025-26, GST revenue growth was 4.67%. The revenue reducing effect of these major tax interventions has continued in 2026-27. PIT shows a growth of 6.8% in the first quarter of 2026-27 while GST revenues showed a contraction of (-)11%.
In the meantime, the Indian economy was beset by the West Asian crisis and its related impact, including high and volatile global crude oil prices and other supply-side uncertainties. As retail fuel prices rose, the government reduced excise duties to ease the burden on consumers. This had a direct bearing on revenue from Union excise duties, which contracted by 22.4% in the first quarter of 2026-27.
In order to make up for the shortfall in revenue receipts, the government initiated some remedial measures. First, a Health Security se National Security (HSNS) Cess was introduced with effect from February 1, 2026 even as the GST Compensation Cess was discontinued. Second, the windfall tax on exports of diesel, petrol and aviation turbine fuel was increased effective August 3, 2026. Third, there was an increase in import duties through increased rates on gold and silver bullion and other specific precious metal articles, sweepings, and clad metals. One additional factor is the likelihood of a higher nominal GDP growth rate as compared to the budgeted growth of 10.04%. We expect the 2026-27 nominal GDP growth to be in the range of 12.5% to 13%. This projection reflects an expected real GDP growth of about 7% together with an Implicit Price Deflator (IPD)-based inflation of 5%-5.5%, consistent with the present trajectories of Consumer Price Index (CPI) and Wholesale Price Index (WPI) inflation at 3.9% and 9.3%, respectively, in the first quarter of 2026-27. We note that even with a higher nominal GDP growth rate, the magnitude of nominal GDP as per the 2022-23 base series is estimated at ₹391 lakh crore. This will be lower than the budgeted level at ₹393 lakh crore. On the whole, we consider that the estimated GTR would be realised or fall short by a small margin. At some suitable time, the reduction in excise duty on fuel prices must be restored.
Transfers to States
In estimating net tax revenue from GTR, a factor of 65%, which was the ratio of net to gross tax revenues in 2025-26 and 2026-27 (BE), can be applied since the Sixteenth Finance Commission (FC16) retained the share of States in the divisible pool of central taxes at 41%. There may be a marginal reduction in the shareable pool due to the introduction of the non-shareable HSNS Cess although some part of the revenues from this cess may go to the States as non-FC grants.
In the first quarter of 2026-27, there was a sharp contraction in tax devolution to the States to the extent of (-)19.5%. In subsequent months, there is an expectation of an increase in the assignment of central tax revenues to the States. Based on the FC16’s recommendation, the FC grants for the States are budgeted to contract by an amount of ₹23,556 crore in 2026-27.
The Reserve Bank of India provided major fiscal support in the form of dividends, which were transferred to the Centre in May 2026. As a result, 77% of the budgeted dividends and profits for the full year had already been covered in the first three months. We expect the budgeted amounts for non-tax and non-debt capital receipts to be realised.
The Centre’s non-tax revenues contributed 37% of its net revenue receipts in the first quarter of 2026-27. During the quarter, major subsidies had to be increased by 37.4% due to the unexpected rise in global crude oil prices, although the growth in revenue expenditure was contained at 7.4%. The Centre was able to front-load its capital expenditure in the first quarter of 2026-27, which grew by 23.7%, compared with a contraction of (-)23.3% in the fourth quarter of 2025-26.
For the year as a whole, the crisis in West Asia is likely to continue keeping global crude oil prices under pressure. If the major subsidies in the first quarter are extrapolated to estimate the annual subsidy requirement, realised subsidies are expected to exceed the budgeted amount by about ₹50,000 crore.
Debt and deficit
Using first-quarter data, the Centre’s fiscal deficit accounted for 18.2% of the annual budgeted magnitude, while the corresponding share of the revenue deficit was 0.4%. The impressive revenue account balance is mainly due to the contribution of non-debt receipts.
Fiscal deficit, calculated as the increment in debt, is estimated at ₹18.16 lakh crore. If this is realised, the fiscal deficit-to-GDP ratio, with respect to the new GDP series, is estimated at 4.6%. Correspondingly, the debt-to-GDP ratio is estimated at 55.8%. This is close to the budgeted level, taking into account the impact of the new GDP series. Some slippage may still occur due to a shortfall in tax revenues, an unbudgeted increase in revenue expenditure arising from additional subsidies, and a slightly higher external debt amid sustained pressure on the Indian rupee. As of now, significant deviations from the budgeted fiscal outcomes appear unlikely. However, an escalation of the war could deliver a major jolt to the economy and central finances.
C. Rangarajan is former Chairman, Prime Minister’s Economic Advisory Council and former Governor, Reserve Bank of India. D.K. Srivastava is Member, Advisory Council to the Sixteenth Finance Commission and former Director of the Madras School of Economics. The views expressed are personal
Published – August 21, 2026 12:16 am IST
