Fiscal path hinges on direct taxes as customs, excise revenues face pressure: Report

India's fiscal future hinges on the strength of direct tax collections, according to a report by Dolat Capital. The government's spending has outpaced last year's pace during the first five months of the fiscal year, driven by higher capital expenditure and subsidies. This has pushed the primary deficit to 67% of the budget estimate, compared to 23% in the same period last year.

The fiscal deficit stood at Rs 7.1 trillion, or 41.9% of the budget estimate, up to August 2026, marking an 18.7% increase from the previous year. Total expenditure rose by 10.1% year-on-year to Rs 20.7 trillion, with capital expenditure increasing 18.6% to Rs 5.1 trillion. Government spending has been front-loaded in the early months, with subsidies accounting for 37% of the budget estimate, up from 30% last year.

On the revenue side, total receipts increased by 7% year-on-year to Rs 13.7 trillion. Net tax receipts rose by 2.04% to Rs 8.3 trillion, while non-tax receipts increased by 9.7% to Rs 4.5 trillion. Non-debt capital receipts surged by 135% to Rs 0.8 trillion.

The report suggests that tax collections have generally followed last year's trend, bolstered by stronger corporate and income tax collections. However, weaker excise revenues and lower customs duties on edible oils and sugar could put pressure on indirect tax receipts. The key monitorable for government finances will be the ability of direct tax collections to offset the pressure from customs and excise revenues.