India’s Fiscal Numbers Look Strong - But There’s More Beneath the Surface

At first glance, India’s fiscal report card for September 2025 looks great. The government reported a fiscal surplus of ₹25,030 crore, bringing the cumulative deficit down to 36.5% of the full-year target, compared to 38.1% in August. That sounds like progress - but dig deeper, and the story isn’t as straightforward as it seems.

The improvement is less about policy efficiency and more about timing. The surplus was driven largely by a one-off boost in tax inflows, not by sustained fiscal strength.

The Headline Numbers: A Temporary Fiscal Boost

September’s fiscal surplus came mainly from a bunching of advance tax payments ahead of the September 15 deadline. That led to a surge in government tax collections - ₹4.19 trillion in September versus just ₹1.48 trillion in August, almost a threefold jump.

Such spikes aren’t new. Earlier this year, in May 2025, the government’s fiscal position also improved temporarily after the RBI dividend payout. Like that episode, the September surplus is more of a short-term liquidity boost than a reflection of stronger fundamentals.

Caution #1: Tax Flows May Slow Down

The government’s net tax revenue is expected to face headwinds in the coming months due to three key reasons:

• Front-loading of inflows: Much of this year’s tax revenue has already been realized in September, so upcoming months may see normalization.
• Refund season ahead: Starting November, tax refund disbursements will likely pull down net tax receipts.
• GST rate cuts: The recent reduction in GST rates is likely to temporarily dent revenues before higher consumption kicks in to offset it.

Put simply, September’s strength could turn into a revenue slowdown soon especially since collections are still running behind annual targets.

Caution #2: Government Spending Is Rising Fast

On the spending front, things are heating up. The government has already utilized 51% of its full-year capital expenditure target, and with continued focus on infrastructure and growth, that number could easily overshoot.

Other factors are adding to the fiscal load too - the hike in dearness allowance for government employees, higher defence spending, and an expected rise in subsidies following prolonged monsoon losses. These are essential expenditures, but they also limit fiscal flexibility in the short term.

Can the 4.4% Fiscal Deficit Target Hold?

With revenues likely to taper and spending still rising, the big question is whether India can meet its 4.4% of GDP fiscal deficit target for FY26.

There are some cushions. Non-tax inflows like dividends from public sector undertakings (PSUs) and the government’s asset monetization plan - could offset some of the shortfall. But the larger challenge lies in maintaining fiscal discipline without stalling growth.

The government’s emphasis on capital spending is justified - it’s essential to sustain growth amid global tariff uncertainties. However, the combination of higher welfare costs, revenue loss from GST cuts, and potential slippage in non-tax receipts makes the target a tough one to defend.

Even if the fiscal deficit breaches 4.4% slightly, it may not be alarming. But a bigger miss could alter the fiscal narrative - affecting bond yields, ratings sentiment, and India’s macro stability outlook.

Key Takeaways

• September 2025 saw a fiscal surplus of ₹25,030 crore, reducing the deficit to 36.5% of the annual target.
• The improvement came from advance tax inflows, not from structural revenue gains.
• Upcoming months could see lower net tax receipts due to refunds and GST rate cuts.
• Government spending pressures - capex, salaries, defence, and subsidies - will keep the fiscal load high.
• Maintaining the 4.4% deficit target looks challenging but not impossible if non-tax revenues hold up.

The numbers may look fine today, but the coming quarters will reveal whether the government’s fiscal resilience runs deeper than a one-month surplus.

Disclaimer: This article is for informational and educational purposes only. It should not be treated as investment, tax, or financial advice.