Fiscal Deficit: Why the 4.4% Target for FY26 Is Getting Harder to Hold

India’s fiscal deficit numbers for October 2025 showed a sharp jump. The deficit has now reached ₹8.25 trillion, which is 44% higher than last year and already 52.6% of the full-year target.

This raises an important question: Can the government still meet its FY26 fiscal deficit target of 4.4% of GDP?

Why Did the Fiscal Deficit Spike?

To understand the jump, it’s important to look at how revenue flows often bunch up in certain months.

• In May, the entire RBI dividend was recorded at once, creating a temporary fiscal surplus.
• In September, all advance tax payments came in together, again boosting revenues for that month.
• As a result, October’s net tax inflows were just 10% of September’s, making the monthly deficit look unusually high.

Because tax inflows dropped sharply in October, the fiscal deficit ratio jumped from ~35% of the annual target to 52.6% in a single month.

This does not automatically mean things are off-track, but it does create pressure for the rest of the year.

It’s Not Just Revenue - Spending Is High Too

FY26 is turning out to be a year where the government cannot easily cut expenditure.

• Defence spending has accelerated because India is near the brink of geopolitical conflict.
• US sanctions have complicated external trade and supply chains.
• To support domestic industry and offset export challenges, the government is relying heavily on capital expenditure (capex).

The good news: This push seems to be helping - India reported 8.2% GDP growth in Q2FY26. Here’s a sector-wise breakdown of the 8.2% GDP growth. The challenge: revenues are soft, but expenditure remains non-negotiable.

What Happens If the Fiscal Deficit Spills Over?

There are real risks if the deficit exceeds the 4.4% target.

1. Breaks the recent record of fiscal discipline

For the last three years, the government has followed a clear path of fiscal consolidation. A miss now could push India off this path.

2. Global investors may react negatively

Rating agencies and global funds closely track India’s deficit numbers. A slip can lead to outlook downgrades, lower investor confidence, and reduced appetite for Indian debt.

3. Pressure on the rupee

A higher deficit often weakens currency sentiment, which can increase import costs, add inflation pressure, and make external borrowing more expensive.

Should the Government Still Allow a Higher Deficit?

Surprisingly, the answer may be yes - temporarily.

There are moments in the economic cycle where growth and strategic spending take priority over strict fiscal discipline. FY26 appears to be one such year.

Here’s the reasoning:

• Defence needs cannot be delayed.
• Capex is driving growth and must continue.
• Cutting spending sharply could hurt the economy more than a slightly higher deficit.

The government could consider relaxing the fiscal deficit target to around 5% of GDP for FY26 (and possibly FY27). This would give the economy more breathing space while signalling that the deviation is temporary.

The key is clear communication - markets should understand that the deviation is part of a short-term strategy, not a long-term shift.

The Bigger Picture

India faces a tough macro environment:

• Revenues are uneven
• Spending pressures are high
• Global conditions are unfavourable
• Growth needs support

In such a year, taking a fiscal chance is not a sign of weakness - it may be a strategic decision to protect growth momentum.

For now, the government’s challenge is to balance fiscal prudence with economic priorities, without losing investor confidence.

Disclaimer: This article is for informational and educational purposes only. It explains economic and fiscal developments based on publicly available data and should not be treated as financial, investment, or policy advice.