India’s Fiscal Deficit Widens to ₹5.98 Lakh Crore in April–August

The fiscal deficit for the first five months of the current financial year has widened, raising concerns over government finances despite support from the Reserve Bank of India’s record dividend transfer. According to data released on September 30, the fiscal deficit touched ₹5.98 lakh crore by the end of August, which is 38.1 percent of the full-year target. This is significantly higher compared with the same period last year, when the deficit stood at 27 percent of the budget estimate.

Fiscal Deficit Trends in April–August

Government data shows that the fiscal deficit, which measures the gap between expenditure and revenue, expanded considerably in the April–August period of FY2025. The ₹5.98 lakh crore figure indicates a faster pace of spending against slower revenue growth. Last year, at the same stage, the fiscal deficit was relatively lower at 27 percent of the annual estimate.

This increase reflects both higher government capital expenditure and slower-than-expected tax revenue inflows, putting pressure on the fiscal balance.

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Higher Capital Expenditure

A key factor behind the widening deficit has been the government’s aggressive push towards capital spending. During the first five months of the fiscal year, capital expenditure reached ₹4.32 lakh crore, which accounts for 38.5 percent of the full-year target. In comparison, only 27.1 percent of the target had been spent in the same period last year.

The rise in capital expenditure highlights the government’s focus on infrastructure creation and long-term growth investment. However, while it supports economic activity, it has also added pressure on the fiscal deficit at a time when revenues are not keeping pace.

Decline in Revenue Growth

On the revenue side, tax collections have been lower compared with the previous year. Net tax revenue stood at ₹8.1 lakh crore, which is 28.6 percent of the full-year target of ₹28.37 lakh crore. In the corresponding period last year, the government had already achieved 33.8 percent of its revenue target.

The slowdown in tax collections reflects the impact of measures announced in the Union Budget 2025. In particular, the income tax rate cuts introduced earlier this year reduced direct tax collections, limiting revenue growth at a time when expenditure commitments have increased.

Impact of RBI Dividend Transfer

The government received a ₹2.7 lakh crore dividend transfer from the Reserve Bank of India earlier this year. This provided temporary support to the fiscal situation and cushioned the shortfall in tax revenues. Without this transfer, the fiscal deficit figures could have been even higher.

However, analysts suggest that the one-time transfer cannot fully offset the decline in recurring revenue sources such as taxes, meaning fiscal pressures are likely to persist.

Asian Development Bank’s Fiscal Outlook

The Asian Development Bank (ADB) released its latest outlook on September 30, offering a cautious view of India’s fiscal situation. According to ADB, the government may find it difficult to meet its fiscal deficit target of 4.4 percent of GDP for the current year. However, the deficit is still expected to be lower than the 4.7 percent recorded in FY2025.

The ADB noted that tax revenue growth is likely to be lower than earlier projections. This is partly because the Goods and Services Tax (GST) cuts implemented in recent months were not factored into the original Union Budget. At the same time, expenditure levels are expected to remain steady, which will push the deficit higher.

Nevertheless, ADB expects the final fiscal deficit to come in below last year’s 4.7 percent of GDP, suggesting that while there will be slippage, the situation may still be relatively better compared with the previous fiscal year.

Non-Corporate Tax Collections Decline

Another area of concern has been the fall in non-corporate tax collections. As per government data released on September 17, non-corporate tax revenue declined by 7.3 percent to ₹96,784 crore. This decline adds to the overall slowdown in tax revenues and highlights the challenges the government faces in broadening its tax base.

Balancing Expenditure and Revenue

The latest data shows the central government is walking a fine line between supporting growth through higher capital expenditure and maintaining fiscal discipline. While capital spending has been scaled up significantly to boost infrastructure and long-term growth prospects, revenues are lagging behind due to policy-driven tax reductions and lower-than-expected collections.

This mismatch between revenue and expenditure has widened the fiscal deficit in the first half of the financial year. Unless revenue collection picks up in the coming months, the government could face difficulty in staying close to its fiscal deficit target.

Implications for Fiscal Policy

The widening deficit has policy implications going forward. On one hand, higher capital expenditure can aid economic growth and job creation, which are priorities for the government. On the other, the persistent shortfall in revenue growth raises concerns about fiscal sustainability, particularly if global headwinds or domestic slowdowns affect revenue mobilisation further.

The record dividend transfer from the RBI has provided some temporary breathing room, but such inflows are not recurring. International agencies like ADB are therefore keeping a close watch on whether India can balance its growth agenda with fiscal prudence.

Outlook for the Rest of the Fiscal Year

As the year progresses, the fiscal picture will depend on how revenue collections improve in the coming months. The impact of GST rate cuts and income tax reductions will continue to weigh on direct and indirect tax receipts. At the same time, maintaining high levels of expenditure could keep the fiscal deficit under pressure.

While the government may not meet its fiscal deficit target of 4.4 percent, the expectation from ADB that the final deficit will be lower than last year’s 4.7 percent suggests that some level of fiscal improvement is possible. Much will depend on whether economic activity remains strong enough to support higher revenue collections in the second half of the year.

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