War pause eases pressure on FY27 fiscal deficit target as govt sees improving outlook

India's fiscal consolidation roadmap has received a boost after easing geopolitical tensions in West Asia and softer crude oil prices improved the government's fiscal outlook, even as officials remain cautious about achieving the ambitious fiscal deficit target of 4.3% of GDP for FY27.

Government sources told Business Today that while the fiscal deficit target continues to be challenging, recent developments have eased some of the pressures that had emerged earlier this year when the conflict in West Asia pushed up global energy prices and threatened to widen subsidy and import bills.

The assessment comes after the Controller General of Accounts (CGA) data showed the Centre's fiscal deficit narrowing sharply to Rs 1.62 trillion, or 9.6% of the Budget Estimate, by the end of May, compared with 21.4% in April. The improvement was largely driven by the record Rs 2.87 trillion dividend transferred by the Reserve Bank of India.

Officials cautioned that the first two months of the fiscal year are not indicative of the government's full-year fiscal position, given the uneven flow of tax collections, dividends and expenditure during the year. However, they said lower crude oil prices following the de-escalation of hostilities in West Asia have improved the macroeconomic backdrop.

Last month, Chief Economic Adviser V. Anantha Nageswaran had described meeting the 4.3% fiscal deficit target as "challenging", citing elevated fertiliser prices, energy market volatility and uncertainty arising from the conflict in West Asia. 

With the conflict now easing, officials believe some of those risks have moderated. Softer crude prices are expected to ease pressure on fuel-related revenues, subsidy expenditure and inflation, while improving the government's fiscal arithmetic.

The latest fiscal accounts nevertheless reflect the impact of front-loaded government spending. Total expenditure rose 18% year-on-year during April-May, led by higher capital expenditure, food subsidy and fertiliser subsidy outgo. Interest payments also increased compared with the corresponding period last year.

Despite the improvement in the deficit position, officials said sustaining the fiscal glide path will depend on the pace of tax collections, GST revenues, non-tax receipts and continued stability in global commodity prices during the remainder of the financial year.

The government has budgeted a fiscal deficit of 4.3% of GDP for FY27 and remains committed to adhering to its medium-term fiscal consolidation roadmap.