As the Union Budget for 2026-27 approaches, the government faces a significant challenge: a massive shortfall in tax revenues coupled with slower-than-expected economic growth. However, a diversified revenue stream and favourable statistical adjustments are expected to keep the broader fiscal math on course, preventing major slippage from deficit targets.
Understanding the Revenue Gap
Tax collections for the first eight months of the current fiscal year (April-November FY26) grew by a mere 3.3%, a sharp deceleration from the 10.8% growth projected in the budget. Economists now anticipate a substantial tax revenue gap of ₹1.5 to 2 trillion for the full financial year. This shortfall, equivalent to about 0.3% of GDP, stems from multiple factors.
The government's income tax projections, which budgeted for a 13.1% increase, were optimistic despite significant past revisions. Corporate tax collections have been tepid, reflecting the pressure from declining nominal GDP growth. Furthermore, the revenue impact of cuts in Goods and Services Tax (GST) rates, not fully accounted for in last year's budget, has also contributed to the gap.
The Counterbalancing Forces
The silver lining lies in the government's successful diversification of income sources. Non-tax revenues have surged beyond expectations, providing a critical buffer. Dividends and profits transferred by public sector enterprises have been exceptionally robust. By November 2025, these transfers had already reached 104% of the full-year Budget estimate, amounting to ₹3.4 trillion.
Additionally, disinvestment receipts have staged a remarkable comeback. The government had already garnered ₹23,717 crore by November, surpassing the total collections of the past two years (around ₹8,900 crore each) and putting it on track to meet the annual target of ₹47,000 crore. "The RBI dividend has been a source of support," noted Kanika Pasricha, Chief Economic Advisor at Union Bank of India. "Disinvestment numbers have performed well this year due to asset sales/monetisation by the government."
The Role of GDP Revisions
Nominal GDP growth is a pivotal variable in fiscal calculations, as the deficit is expressed as a percentage of GDP. The government's budget for FY26 assumed a 10.1% nominal GDP growth rate. The First Advance Estimate released on 7th January 2026, however, pegged it lower at 8.0%.
Despite this slowdown, a fiscal slippage is not automatic. In absolute terms, the Budget projected nominal GDP at ₹356.98 trillion. The advance estimate places it slightly higher at ₹357.14 trillion. This counterintuitive outcome is due to an upward revision of the previous year's (FY25) GDP base to ₹325.62 trillion from ₹324.11 trillion, making the original target more achievable even with moderated growth.
Fiscal Trajectory and Future Path
Most economists believe the Centre will largely meet its fiscal deficit target of 4.4% of GDP for FY26, with any potential slippage contained within 10-20 basis points. The government has maintained capital expenditure, spending ₹6.58 trillion in April-November, achieving 58.7% of the annual target.
"We still think the Centre could scrape through and meet the fiscal target this year, despite massive tax revenues slippage," said Madhavi Arora, Chief Economist at Emkay Global. "Robust RBI and PSU transfers and cuts in non-core capex and miscellaneous revenue expenditure could help offset the taxation miss."
Looking ahead to the Budget for FY27, the government is expected to shift from targeting a direct fiscal deficit figure to aiming for a lower debt-to-GDP ratio. This technical shift will guide the deficit number for the next financial year. Analysts, including those at Goldman Sachs, expect the fiscal deficit for FY27 to be in the range of 4.0% to 4.2% of GDP.
Factors supporting this consolidation include an anticipated rise in nominal GDP growth as inflation moves towards 4%, and sustained strength in dividends and disinvestment. However, the tax shortfall this year may lead to more conservative revenue estimates for FY27, especially in the absence of clear signals for a strong, sustainable consumption revival. While non-tax revenues offer comfort, a broader tax base and stronger consumption will be key to enabling faster fiscal consolidation or increased spending on welfare schemes.
