How the government finance math looks more challenging in H2 FY27

The Central government’s finances have weakened in the first half of the current financial year (H1 FY27) compared with a year ago, but the fiscal deficit levels remain within manageable limits and are not as bad as previously expected. However, the second half could be more challenging as the dividend cushion fades, and the government faces a higher revenue and expenditure run rate to meet its full-year Budget targets.

In H1 FY27, the government’s fiscal deficit stood at 42.1% of the budget estimates, higher than 36.5% in the same period last year. However, despite the worsening, it remained at the halfway mark of 50%. This was achieved without compromising on capital expenditure commitments, which stood at 53.6% of the budget estimates.

Two factors helped the numbers even as fertilizer subsidy ran high as expected and tax collections remained subdued: dividends and profits (87.4% of BE) and disinvestments (77.7% of BE). While receipts from dividends and profits are running marginally lower than last year, disinvestment proceeds have offered a bigger cushion.

Fading cushion

For the past few years, the government has managed to keep its finances in check, primarily driven by massive dividends and profits from the Reserve Bank of India and other public-sector companies. This year, the government received ₹3.4 trillion in the form of dividends and profits. This accounted for 18.6% of total receipts and was sufficient to cover over 50% of capital expenditure during the period.

Since a big part of the budgeted aim, 87.4%, has already landed, it makes the first-half finances look better. The imbalance between the first- and second-half dividend receipts is visible at least in the last few years.

They made up 14% of total receipts on average in the first half FY23-FY26, compared with just 3.6% in the second half. As dividend buffer fades in the second half, the fiscal strain would become more visible. In the last two years, 60-68% of budgeted fiscal deficit showed up in the second half of the year.

Disinvestment deluge

After several years, the government has managed an impressive strike rate on disinvestment proceeds, 77.7% of BE in the first half, or ₹62,159 crore. This accounts for 3.4% of the total receipts and was enough to cover as much as 50% of the fertilizer spend during the period.

This was mainly achieved from a 6.5% stake sale of Life Insurance of India (LIC) earlier this year, which fetched the government ₹31,515 crore. Stake sales in Coal India and NHPC added another ₹9,900 crore to the government’s kitty.

Since a large part of the government’s ₹80,000 crore has already been realised, it helped H1 finances look better as well. However, unlike dividends, disinvestments don’t follow a distinct trend of better H1 than H2.

In fact, the Cabinet-approved strategic sale of 60.7% stake sale in IDBI Bank expected to finalized this year itself could add another ₹52,878 crore. If this deal closes this year, disinvestments would have the best year at least in seven years. Against the backdrop of financial stress coming from the West Asia war, this could offer the government much-needed support.

Higher strike rate
While non-tax revenues have helped the government finances, tax collections have lagged, reaching only 46% of BE or recording only 6.1% year-on-year growth in the first half. This came on the back of slow income tax growth of 6.7%, and a decline of 22.3% in excise duty collections after the government announced tax cuts on fuel following the price pressures earlier this year. Higher customs duties on gold and others helped the government's finances to some extent, but the second-half ask remains high.
A back-of-the-envelope calculation shows gross tax collections need to grow 12.3% y-o-y in the second half to meet the Budget estimates. The second-half strike rate for personal income tax remains difficult at 41%, while the excise duty collection aim will be missed. Further pressure may come from additional cuts to control fuel prices if crude oil costs remain elevated.

Despite capex levels remaining healthy in the first half, it also needs to grow 16.2% y-o-y in H2 compared to 12.7% in H1. The government has missed its budget capex targets by 1.3-5.3% in the last four years despite maintaining a good H1 trend in three of four years.
While H1 figures show contained deficit levels, the second half may become more challenging and even result in moderate fiscal slippage. “With global energy prices remaining at elevated levels, Icra expects an overshooting on the fertiliser and fuel subsidy front, as well as a shortfall on the receipts side, which is expected to result in a modest fiscal slippage of ₹1.3-1.4 trillion relative to the FY27 target,” said Aditi Nayar, chief economist at Icra.