India’s Fiscal Deficit May Breach Targeted 4.3% Mark in FY27 to Reach 4.5%: BMI

The Gulf war is set to derail the fiscal consolidation trajectory set by the government for FY27.

While the government has set a target of limiting the fiscal deficit at 4.3 percent of GDP in FY27, the figure may breach the mark to reach 4.5 percent, according to a report by BMI, a unit of Fitch Solutions.

India’s increased spending to reduce the adverse impact of the Iran war will be the main reason for the country missing the fiscal deficit target this financial year, the report said.

The government is expected to introduce policies to redirect critical inputs to key industries, restrain business costs, and improve financial support for firms, the report said.

The government had reduced energy and fertiliser subsidies to 1.5 percent of GDP to achieve the fiscal consolidation target. However, these efforts may be impacted by inflationary pressure and supply chain disruption caused by the war in the Gulf region.

The report said that the Rs 1 lakh crore Economic Stabilisation Fund is likely to be used for additional subsidies and temporary tax relief to provide relief to businesses facing rising input costs.

“We also expect the stabilisation fund to finance temporary tax deductions. The central government has waived customs duties for key petrochemical products in Q2 2026. Among India’s companies, this policy will especially benefit pharmaceuticals, textiles, paints, and toys producers,” the report said.

The government will try to minimise the impact of supply chain disruptions on the agriculture sector, which employs about 43 percent of the country’s working population, the report said.

Since the start of the war in West Asia, the supply of natural gas has been disrupted. Natural gas is a key component in making fertilisers. Experts expect a rise in production costs, which may prompt the government to increase fertiliser subsidies to support farmers.