New Delhi [India], September 1 : Strong tax collections are providing a cushion to the Centre's finances, but higher crude and fertiliser prices and slower-than-expected nominal GDP growth could make it more difficult for the government to meet its 4.3 per cent fiscal deficit target for financial year 2026-27, ICICI Bank Research said.
In its Monthly Economic Update for August, ICICI Bank Research said the Centre's gross tax revenue grew 18 per cent during April-July 2026, supported by a 24 per cent year-on-year rise in direct tax collections and 11 per cent growth in GST collections.
The report said the fiscal balance stood at Rs 4.6 trillion during the period, equivalent to 27 per cent of the FY27 Budget Estimate, compared with 30 per cent during the corresponding period last year.
"While strong revenue growth provides a cushion, higher crude and fertiliser prices along with lower Q1FY27 nominal GDP growth poses a challenge in achieving the fiscal deficit target of 4.3% of GDP target in FY27," the report said.
ICICI Bank Research noted that direct tax collections remained a key source of revenue strength. Corporate tax collections rose 21 per cent year-on-year and income tax collections increased 24 per cent during April-July. Net direct tax collections had risen 23 per cent year-on-year as of August 10.
Indirect tax collections grew 12 per cent during the period, with customs duty collections rising 38 per cent. However, excise duty collections declined 23 per cent, largely due to lower excise duty rates on petroleum products.
On expenditure, total government spending grew 13 per cent year-on-year in April-July, while capital expenditure rose 30 per cent year-on-year, including a 54 per cent year-on-year increase in July. The report said this showed that the government continued to prioritise productive spending.
At the same time, major subsidies increased 35 per cent year-on-year, with fertiliser subsidy rising 46 per cent and food subsidy 23 per cent.
"Nevertheless, the sustained strength in revenue receipts, particularly direct taxes and non-debt capital receipts, provides an important fiscal buffer," ICICI Bank Research said.
The report also highlighted resilient credit demand, with bank credit growth reaching 19.3 per cent year-on-year in July. Credit to industry grew 20 per cent, services 22.9 per cent and personal loans 16.2 per cent.
ICICI Bank Research said robust foreign deposit flows of USD 90-100 billion should help ensure ample liquidity conditions and support credit growth in the coming months.