Challenges Ahead for FY26 Fiscal Targets as UBI Report Highlights Weak Tax Growth

India’s ambition to achieve its financial targets for the fiscal year 2026 is facing significant challenges, according to a recent report from Union Bank of India. The report highlights a slower-than-anticipated growth in both corporate and income tax collections, which are crucial for the government’s fiscal strategy. With a focus on maintaining elevated capital expenditure, the report warns that the government’s goal of reducing the fiscal deficit may be difficult to attain amid these revenue shortfalls.

Fiscal Deficit and Revenue Trends

The Union Bank report reveals that India’s fiscal deficit has surged to Rs 5.73 lakh crore from April to September 2023, accounting for 37% of the total budget estimate. This marks a notable increase from the previous year’s fiscal gap of Rs 4.75 lakh crore, which represented 30% of the revised estimate. The 21% year-on-year rise in the fiscal deficit is primarily attributed to capital spending outpacing revenue inflows. In the first half of FY26, government expenditures rose by 9%, while revenue receipts only increased by 5.7%. Despite these challenges, the government aims to reduce the fiscal deficit to 4.4% of GDP in FY26, down from 4.8% in FY25. However, the report cautions that a decline in direct tax collections could jeopardize this target.

Corporate and Income Tax Collections

The report emphasizes that the government’s fiscal strategy for FY26 heavily relies on robust tax revenues. However, the growth in corporate and income tax collections has not met expectations. This slower growth poses a risk to the government’s fiscal math, which is predicated on strong tax revenues to support its ambitious capital expenditure plans. The report indicates that achieving the fiscal deficit target will require a significant turnaround in direct tax collections over the next two quarters. The government’s commitment to reducing the fiscal deficit may be tested if these tax revenues do not improve.

Indirect Tax Performance and GST Reforms

On the indirect tax front, the performance of the Goods and Services Tax (GST) has shown mixed results. In September, GST collections rose by 9% year-on-year to reach Rs 0.76 lakh crore. However, the overall growth trend for the first half of FY26 remained modest, with GST revenue increasing by only 5.8% to Rs 4.67 lakh crore. The report suggests that future revenues may face additional challenges due to potential reductions in GST rates. Union Bank estimates that the fiscal impact of GST reforms for the remainder of the year could amount to around Rs 24,000 crore, which may be managed through the GST compensation cess fund. The stronger GST inflows in September compared to August indicate that the rate cuts may not significantly disrupt the government’s fiscal calculations.

Non-Tax Revenues and Future Outlook

Non-tax revenues have provided crucial support to the government’s budget, rising by 30.5% year-on-year to Rs 4.66 lakh crore in the first half of FY26. This increase is largely attributed to a higher-than-expected dividend from the Reserve Bank of India, which transferred Rs 2.6 lakh crore to the government, surpassing the budgeted amount of Rs 2.1 lakh crore. As fiscal targets such as limiting the fiscal deficit and managing the debt-to-GDP ratio serve as essential benchmarks for budget planning, the government’s ability to meet these goals will largely depend on revenue performance in the upcoming quarters, particularly in terms of direct tax collections.

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