New Delhi [India], October 5 : Government spending on non-defence capital projects could decline by around 3 per cent in the second half of FY27 as fiscal pressures increase, despite a strong start to the financial year, Jefferies said in a report.
The brokerage said higher energy costs, rising subsidy spending and a lower nominal GDP estimate could limit the government's ability to maintain the current pace of capital expenditure while meeting its fiscal deficit target.
Central government capital expenditure increased 18 per cent year-on-year during April-August, higher than the 14 per cent growth targeted in the FY27 Budget.
However, the growth was led by defence spending. Defence capital expenditure rose 37 per cent during the period, while non-defence capital expenditure grew 16 per cent.
The brokerage said that if the government needs to cut spending to stay within its fiscal targets, defence expenditure is unlikely to be reduced due to geopolitical concerns. This could put greater pressure on non-defence capital expenditure in the remaining months of FY27.
Jefferies expects non-defence capital expenditure to decline 3 per cent during September-March, compared with 16 per cent growth in April-August. For the full financial year, it expects non-defence capex to grow 5 per cent, below the 10.3 per cent increase estimated in the Budget.
The brokerage also flagged rising pressure from subsidy spending. Government subsidy expenditure increased 24 per cent year-on-year during April-August, compared with the Budget estimate of a 10 per cent decline.
Jefferies expects this could create around Rs 1 trillion of additional pressure on non-capital expenditure.
It also pointed to the risk of higher government spending on drought-related measures, with rainfall running 13 per cent below normal.
However, the government's revenue position could provide some relief. Disinvestment receipts have reached Rs 558 billion, or around 70 per cent of the Rs 800 billion target.
The proposed privatisation of IDBI Bank, estimated to generate around Rs 250 billion, could further help the government exceed its disinvestment target.
Jefferies expects the government to maintain its FY27 fiscal deficit target of 4.3 per cent of GDP. The October-March borrowing calendar also points to the same level.
However, the brokerage said a revised nominal GDP estimate, around 3 per cent lower than the original projection, could reduce the government's fiscal room.