Centre's FY27 fiscal deficit may exceed Budget target by Rs 1.2 lakh crore: SBI Research
India's central government anticipates a fiscal deficit exceeding budget estimates by Rs 1.2 lakh crore in 2026-27. This increase is primarily attributed to rising fertiliser, LPG, and petroleum subsidy expenses. Strong GST growth and disinvestment receipts may not offset the expected higher deficit. In addition, SBI Research recommends a revised long-term capital gains structure to generate additional revenue.
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Context
A report by SBI Research projects that the central government's fiscal deficit for FY27 may exceed the budget estimate by Rs 1.2 lakh crore, reaching 4.7% of GDP (using the 2022-23 base). This increase is attributed to structural factors like rising subsidies for fertilizer, LPG, and petroleum, alongside the impact of a new GDP base year, despite positive trends in GST collection and disinvestment.
UPSC Perspectives
Economic
The core issue highlights the challenge of fiscal consolidation (the government's strategy to reduce its deficit and debt accumulation). The fiscal deficit represents the government's total borrowing requirement when its expenditure exceeds its non-debt receipts. The (FRBM Act) mandates the government to limit the fiscal deficit to 3% of GDP, a target that has been repeatedly deferred, especially post-pandemic. The SBI report indicates that increased revenue expenditure (spending on subsidies, salaries, etc., which doesn't create assets) is driving the deficit, specifically citing a Rs 90,000 crore increase in fertilizer subsidies and Rs 48,000 crore in petroleum/LPG subsidies. This is concerning because high revenue expenditure crowds out capital expenditure (spending on infrastructure, which has a higher multiplier effect on economic growth). The report also notes that the deficit calculation is affected by the choice of the base year for GDP calculation (2011-12 vs. 2022-23), demonstrating how statistical revisions impact macroeconomic indicators. UPSC often tests the components of the fiscal deficit, the implications of high revenue expenditure, and the mechanisms of deficit financing.
Governance
The report touches upon the critical aspect of deficit financing (how the government funds its deficit). Traditionally, a high fiscal deficit leads to increased government borrowing from the market, which can cause crowding out (leaving less credit available for the private sector) and push up interest rates. However, SBI Research suggests the Centre can finance this wider deficit using its cash balances without increasing market borrowings. The government maintains cash balances with the (RBI) to manage its day-to-day liquidity mismatches. Utilizing these balances is a non-inflationary way to finance the deficit in the short term, but it is not a sustainable long-term solution. This highlights the importance of effective cash and debt management by the government. Furthermore, the report notes that despite stronger (GST) growth and better disinvestment receipts, the deficit is widening, underscoring the rigidity of certain expenditure commitments like subsidies. This raises questions about the efficiency of subsidy targeting and the need for rationalization to ensure fiscal sustainability.
Taxation
The SBI report proposes significant reforms in capital gains taxation to generate additional revenue. It advocates for a layered Long-Term Capital Gains (LTCG) structure, suggesting that the current flat exemption threshold (Rs 1.25 lakh) should be replaced with an inflation-linked threshold (indexation) to better reflect the growing retail investor base and protect real returns. Furthermore, it suggests preferential treatment for longer investment horizons, incentivizing long-term capital formation. The report also recommends reviewing LTCG taxation in conjunction with the (STT), a direct tax levied on the purchase and sale of securities listed on recognized stock exchanges. The suggestion that a 50% increase in STT could generate an extra Rs 45,000 crore highlights the potential of transaction taxes in revenue mobilization. These proposals are highly relevant for UPSC, as questions frequently focus on the rationale behind different tax structures, the debate between direct and indirect taxes, and measures to widen the tax base and improve tax buoyancy.