US tariff threat may nudge fiscal deficit up to 4.5% this year

New Indian Express

21 hours ago

MUMBAI: The rising external risks, especially in the form of punitive tariffs imposed by US President Donald Trump's administration, may see the country missing the 4.4% fiscal deficit target for this fiscal by a notch to 4.5%, a significant improvement from the past year's 5.1%, a foreign agency has said in a report.
"India's fiscal position is improving considerably, with the central government deficit narrowing from 5.1% to 4.5% of GDP in FY26, though marginally missing the 4.4% target, as economic growth underperforms official projections by about 3%," BMI, a Fitch group company, said in a report.
On the other hand, the general government deficit, including that of the states, will also improve slightly from 8.2% to 8% this fiscal. This is because the states may increase spending due to rising political competition, partially offsetting the Centre's consolidation efforts.
This overall improvement is in spite of the fact that this year's budget has signalled a tactical shift from investment towards supporting middle-income voters, but without losing sight of the need for fiscal consolidation.
On the revenue front, the government has strengthened collection considerably, with central revenue now exceeding 10% of GDP — levels not seen since FY11.
Despite the substantial income tax threshold increase from Rs 7 lakh to Rs 12 lakh from this fiscal, costing around Rs 1 trillion or 0.3% of GDP, overall revenue performance should remain robust as, to compensate for tax cuts, the government has implemented two key measures.
First, it is reducing capital spending from 3.5% to 3.2% of GDP — the first reduction after seven consecutive years of increases. Second, it plans to increase dividend payments from the Reserve Bank and state-owned banks by 9%, though this contributes less than 0.1% of GDP.
The narrowing fiscal deficit should gradually improve the debt position over the coming decade. The government's commitment to fiscal consolidation, even amid economic headwinds and electoral pressures, indicates a clear prioritisation of debt sustainability, the report said.
However, the report lists some risks to this fiscal improvement trajectory, the main being aggressive US tariff hikes.
Such a scenario would compromise growth, curtail revenue collection and likely necessitate increased counter-cyclical spending, potentially derailing the fiscal consolidation agenda.
"However, barring this scenario, we expect the government to maintain its fiscal improvement course through FY26," the report said.