The government used 42% of its full-year deficit target in the first half, compared with 37% last year, as the oil shock pushed up fertiliser and food subsidies. Less noticed: capital spending fell in both August and September, which suggests the government may already be cutting investment to stay within its target.
The Centre’s fiscal deficit reached ₹7.14 lakh crore in April to September, 42.1% of the full-year budget estimate of ₹16.96 lakh crore, according to Controller General of Accounts data released on Friday. A year ago, the government had used 36.5% of its target at this point. The deficit grew almost 25% from a year earlier.
Subsidies: the main pressure
Spending is rising faster than income. Total expenditure rose about 11% to ₹25.5 lakh crore, while total receipts rose only 6% to ₹18.35 lakh crore.
Subsidies explain most of the gap. Revenue expenditure rose 10% to ₹18.95 lakh crore. The government has already spent 54% of its full-year budget for major subsidies, including 73% of the urea subsidy budget and 62% of the budget for other fertilisers.
The cause is the energy crisis. Urea is made from natural gas, and with LNG imports disrupted and prices high, the cost of producing it has risen sharply. The government keeps farm-gate fertiliser prices fixed and covers the difference itself. As gas costs rise, the subsidy bill rises with it.
Revenue has not kept pace. Net tax revenue was ₹12.76 lakh crore, 44.5% of the annual target. Non-tax revenue is well ahead of plan at 72.2% of target, mainly because of the RBI’s large dividend earlier in the year. That is a one-time payment that cannot be relied on in the second half.
Capital spending is slowing
The most important detail is in capital spending. For the half-year, capital expenditure rose 13% to ₹6.55 lakh crore, 53.6% of the annual target, which looks healthy.
But the monthly figures show a different trend. Capex fell 3% in September from a year earlier, after a 30% fall in August. That is two straight months of decline.
When governments face rising deficits, cutting capital spending is often the easiest option. Subsidies and salaries are difficult to cut, while infrastructure projects can be delayed quietly. The August and September figures suggest that may already be happening.
That would matter for the economy. Government capital spending has been one of the main drivers of Indian growth since the pandemic, supporting demand for steel, cement and construction equipment. L&T reported this week that some domestic infrastructure orders had been delayed. Slower government capex could weaken an economy that is already showing signs of slowing.
Will the government meet its target?
The target is 4.3% of GDP. In the past, the government has met its target by cutting spending late in the year, as it did in FY26, when a ₹60,000 crore spending cut kept the deficit at 4.4%.
The second half brings additional costs. The DA increase approved this week adds ₹10,016 crore a year. If oil stays above $110, subsidy costs will keep rising. Unless tax revenue picks up, the government will likely need to cut spending, probably capital spending, to meet the target.
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