Fiscal Slippage Risk Rises as Fertiliser, Spending on Key Schemes Could Push FY27 Deficit to 4.6%

Fiscal Slippage Looms as Centre Prepares for Higher Spending

The Centre is expected to spend Rs 50,000 crore-Rs 1 lakh crore more than budgeted in FY27 due to the West Asia crisis, primarily driven by increased fertiliser subsidies and higher outlays on select schemes. According to government officials, this higher-than-budgeted spending could lead to fiscal slippage, with the fiscal deficit expected to rise to 4.5-4.6 percent of GDP in FY27.

The Budget has pegged the fiscal deficit target at 4.3 percent on the assumption of 10 percent nominal GDP growth. However, due to GDP re-basing, the same Budget target now stands at 4.46 percent for FY27. This means that the fiscal deficit will rise by about 10 basis points only if there is higher revenue spending, and no compression in capital expenditure.

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The government will not cut capital expenditure below the budgeted level in FY27 (Rs 12.21 lakh crore). Officials believe that cutting capital expenditure is not a desirable route, as it has a strong multiplier effect on growth and reducing it would have wider economic consequences.

On the revenue side, the government does not expect any material increase in direct tax collections, which will offset the loss it's experiencing due to excise duty cuts (amounting to over Rs 1 lakh crore). Even if nominal revenues remain stable or grow marginally, a larger portion of that will be absorbed by higher subsidy commitments, particularly on fertilisers and energy.

Fertiliser subsidy is expected to spike, with the central government potentially spending more than Rs 50,000 crore on fertiliser subsidies. The key raw material, natural gas, has seen a sharp increase in prices, and nearly a quarter of our fertiliser requirements are met through imports, with costs having risen significantly.

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The government has already taken steps to shield consumers by reducing excise duty on petroleum products. Officials said that this means that the government has absorbed part of the burden instead of passing it on fully to consumers. However, even after these measures, fuel prices remain elevated compared to earlier levels because imports are now happening at higher rates.

The government is also likely to announce a Rs 2.5 lakh crore credit guarantee scheme for MSMEs, which is currently awaiting Cabinet nod. Well-targeted fiscal expansion can stabilise consumption, crowd in private investment over time, and protect vulnerable sectors, according to Manoranjan Sharma, Chief Economist at Infomerics Ratings.