India’s big-spending strategy faces fiscal headwinds amid weak tax flows

By: Team India Tracker

If tax revenues fail to recover, the Centre may be forced to either curb spending or take on more debt. The balance between fiscal discipline and growth is becoming harder to maintain

The government’s fiscal arithmetic is once again on a knife’s edge. The push to spend big on infrastructure is powering growth and keeping the investment cycle alive, but weak tax inflows are testing the limits of fiscal prudence. For now, New Delhi is walking a fine line—balancing its ambition to sustain capital expenditure with the reality of slowing revenue growth and rising transfers to states.

In the first half of FY2025–26 (April–September), the Centre’s fiscal deficit climbed to 36.5 per cent of the full-year target, up from 29.4 per cent in the same period last year, according to data from the Controller General of Accounts (CAG). Capital expenditure remains the standout driver of India’s fiscal strategy. The Centre spent Rs 5.8 lakh crore, or 51.8 per cent of its annual outlay of Rs 11.2 lakh crore, marking a robust 40 per cent year-on-year increase.

Growth engine

Infrastructure building has become the government’s central growth lever, anchored in the belief that public investment in roads, railways, and logistics can crowd in private capital. After a pre-election lull last year, the pace of project spending has accelerated once again.

But the aggressive front-loading of spending comes with risks. When more than half the capital budget is exhausted in the first six months, the remaining half of the year must either tighten disbursements or risk breaching deficit limits. For now, buoyant non-tax revenues are cushioning the imbalance.

Revenue drag

The revenue picture tells a more restrained story. Gross tax revenue grew just 2.8 per cent in the first half of FY26—well below nominal GDP growth. Income-tax collections rose 4.7 per cent, while corporate taxes barely moved, up just 1.1 per cent, reflecting uneven corporate earnings.

On the indirect side, the data are equally mixed. GST and excise duty collections grew 4.8 per cent, but customs duties fell 5.2 per cent amid slowing imports. Overall, indirect taxes rose only 3.2 per cent, pulling down net tax revenue by 2.8 per cent from a year earlier.

By September, the Centre had collected just 43.3 per cent of its annual target—down from 49 per cent in FY25—a shortfall that looms large heading into the fiscal second half.

Transfers and windfalls

Part of the strain comes from heavier fiscal sharing. The Centre disbursed Rs 8.3 lakh crore to states by October, 15.5 per cent higher than last year. That’s fiscal relief for state governments but a squeeze on the Centre’s own flexibility.

A crucial offset has been record non-tax revenue, up 30.5 per cent, buoyed by the Reserve Bank of India’s Rs 2.7 lakh crore dividend—the highest ever. The windfall lifted total revenue receipts by 4.5 per cent, covering 49.6 per cent of the full-year target. Yet such one-off gains are temporary cushions, not structural solutions.

Staying the course

Despite muted receipts, policymakers remain optimistic. Chief Economic Adviser V Anantha Nageswaran said last week in Mumbai that the government remains on track to meet its fiscal deficit target of 4.4 per cent of GDP, even amid slower nominal growth.

Economists, too, see room for confidence. Aditi Nayar, chief economist at ICRA, estimates that tax revenues must grow over 21 per cent in the second half to hit full-year goals—ambitious, but not unprecedented. Over the past two years, New Delhi has surprised markets by keeping deficit promises despite election spending and global headwinds.

Broader equation

The numbers reflect a deeper reality about India’s growth model. With private investment still hesitant and exports soft, public capital spending has become the economy’s stabiliser. Fiscal policy today is not just about balancing books—it’s the engine room of infrastructure-led expansion.

But sustainability is the question. Heavy early-year spending, weak tax buoyancy, and dependence on central bank surpluses can only paper over structural gaps for so long. A stronger rebound in corporate profits and consumption will be essential to restore fiscal balance.

For now, the government’s math still adds up—but just barely. If tax receipts fail to recover in the coming quarters, New Delhi may face a hard choice: slow spending or borrow more. In the delicate dance between growth and restraint, India is still keeping rhythm—but the tempo is quickening.