FY26 fiscal targets: Meeting estimates might be difficult; UBI report flags weak tax growth

India’s goal of meeting its full-year financial targets for FY26 may prove difficult, with a new report from Union Bank of India flagging slower-than-expected growth in corporate and income tax collections. The bank’s report points out that the Centre’s fiscal strategy for FY26 relies heavily on strong tax revenues, even as capital expenditure continues at an elevated pace. It states, “The reduced fiscal deficit target for FY26 was premised on strong tax collections, while the government continues its robust capex push–essential for stimulating consumption and creating jobs. However, achieving the full-year FY26 fiscal math appears challenging amid subdued growth in corporate and income tax revenues.” Data for the first half of the financial year reveals that the fiscal deficit has already climbed to Rs 5.73 lakh crore between April and September, representing 37% of the budget estimate. The fiscal gap during the same period a year ago stood at Rs 4.75 lakh crore, or 30% of the revised estimate. The sharp increase, up 21% year-on-year, has been attributed to capital spending outpacing revenue inflows. In the first six months of FY26, government expenditure rose by 9% on a yearly basis, whereas receipts grew by only 5.7%. Despite the uneven growth, the government continues to target a reduction in the fiscal deficit to 4.4% of GDP in FY26, compared with 4.8% in FY25. The Union Bank report cautions that softer direct tax collections could test that commitment. On the indirect tax front, GST performance has been mixed. Collections for September increased 9% year-on-year to Rs 0.76 lakh crore. However, the growth trend for the first half of FY26 remained modest, with GST revenue rising 5.8% to Rs 4.67 lakh crore. The report observed, “Looking ahead, revenues may face a further setback due to reduction in GST rates.” The bank has estimated that the fiscal impact of GST reforms in the remainder of the year, around Rs 24,000 crore, could be absorbed through the GST compensation cess fund. It also notes that the stronger GST inflows in September, compared with August, signal that the rate cuts may not seriously disrupt the government’s fiscal math. Non-tax revenues have emerged as a key support to the budget, rising 30.5% year-on-year to Rs 4.66 lakh crore in the first half of FY26. This sharp increase has been driven mainly by a higher-than-budgeted dividend from the Reserve Bank of India, which transferred Rs 2.6 lakh crore to the government this year against the budgeted Rs 2.1 lakh crore. Fiscal targets, such as limiting the fiscal deficit or managing the debt-to-GDP ratio, serve as quantifiable goals for budget planning. Whether the government meets them this year will largely depend on revenue performance over the next two quarters, particularly direct tax collections.