The Centre is likely to retain a fiscal buffer in FY27 as buoyant tax collections and broad-based credit growth support the economy, although rising crude oil and fertiliser prices could put pressure on subsidy expenditure and may require the government to rationalise spending later in the year, ICICI Bank Global Markets said in its monthly economic update for July.
The bank said sustained strength in revenue receipts remains a key positive amid prevailing global uncertainties and provides support for the government to meet its FY27 fiscal deficit target.
ICICI said the Centre’s gross tax revenue grew 14 per cent year-on-year in Q1FY27, supported by healthy direct and indirect tax collections. Direct tax collections rose 12 per cent YoY on a financial year-to-date basis, with corporate tax collections increasing 20 per cent and income tax collections rising 7 per cent.
As of July 13, net direct tax collections had grown 16.4 per cent YoY, driven by a 22 per cent increase in corporate tax and an 11.6 per cent rise in income tax collections. The bank said this sustained momentum provides a positive outlook for direct tax collections in the coming months.
Indirect tax collections also remained robust, growing 13 per cent YoY during FYTD27. Customs collections increased 36 per cent, while GST collections rose 8.5 per cent, reflecting healthy domestic consumption and broad-based economic activity. Consequently, the Centre’s net tax revenue expanded 38 per cent YoY during the period.
On expenditure, ICICI Bank said total spending grew 11 per cent YoY in Q1FY27, with revenue expenditure rising 7 per cent as interest payments contracted 10.3 per cent. However, major subsidies increased 37 per cent, including a 58 per cent rise in fertiliser subsidies and an 18 per cent increase in food subsidies. Capital expenditure grew 24 per cent, reflecting the government’s continued focus on frontloading productive expenditure.
The fiscal deficit stood at Rs 3.1 trillion in FYTD27, equivalent to 18 per cent of the FY27 budget estimate, unchanged from the year-ago period. ICICI Bank cautioned that higher crude and fertiliser prices amid geopolitical tensions could raise subsidy expenditure further, potentially requiring expenditure rationalisation later in the fiscal year.
Meanwhile, credit growth remains supportive, with gross bank credit expanding 17.7 per cent YoY in the fortnight ended July 15. Industry credit accelerated to a 14-year high of 19.2 per cent, while services credit rose 21.4 per cent. ICICI Bank said the outlook for credit growth remains supportive, helped by adequate liquidity from FCNR flows.
