As the Indian government prepares for the Union Budget 2026, it is confronting a significant fiscal challenge: a projected tax revenue shortfall of between ₹1.5 and ₹2 trillion for the current financial year (FY26). This gap is primarily driven by slower-than-expected nominal GDP growth, weaker corporate tax collections, and the impact of Goods and Services Tax (GST) rate cuts that were not fully accounted for in last year's budget estimates.
The Revenue Gap and Its Causes
The scale of the shortfall is evident in the recent performance of tax collections. Data for the period from April to November 2025 shows that tax revenues grew by a mere 3.3%, which is drastically lower than the 10.8% growth rate that was budgeted for the full year. This underperformance has created a substantial hole in the government's finances as it enters the final budget-making phase.
Several factors are behind this trend. The growth in nominal GDP, a critical driver for tax buoyancy, has been softer than anticipated. Collections from corporate taxes have also been subdued. Furthermore, reductions in GST rates, implemented earlier, have led to lower receipts than initially projected, adding to the revenue pressure.
Why the Fiscal Deficit Target Remains Within Reach
Despite the worrying tax numbers, the overall fiscal picture is less alarming. A robust performance in non-tax revenues has provided a crucial buffer for the exchequer. Dividends and profits transferred from the Reserve Bank of India (RBI) and public sector enterprises have already surpassed their annual targets by November 2025.
In addition, disinvestment receipts have made a notable comeback after several years of underachievement, contributing to the government's coffers. Perhaps most importantly, recent upward revisions to India's GDP data mean the denominator for calculating the fiscal deficit ratio is larger. This statistical benefit helps contain the deficit as a percentage of GDP, even with slower revenue growth.
Consequently, most economists expect the central government to broadly meet its fiscal deficit target of 4.4% of GDP for FY26, with only a marginal slippage. This relative stability is allowing policymakers to maintain a focus on longer-term fiscal consolidation.
Looking Ahead to Budget 2026-27
The experience of FY26 is set to shape the strategy for the next financial year. Officials are likely to adopt more conservative assumptions for tax revenue growth in the FY27 budget estimates. The overarching theme will continue to be a commitment to reducing the fiscal deficit and stabilizing the public debt-to-GDP ratio.
This prudent approach suggests that while the government will continue its emphasis on capital expenditure to spur growth, it may exercise restraint in announcing large-scale new revenue expenditure schemes. The goal will be to ensure macroeconomic stability while supporting the economy's growth momentum, which is independently projected to be strong at 7.4% for FY26.
