NEW DELHI: India’s fiscal deficit is likely to breach the government’s target of 4.3 per cent and reach 4.5 per cent of GDP in 2026-27 (FY27), as higher subsidy spending and policy support measures strain public finances, according to a report by BMI, which is a unit of Fitch Solutions.
The report noted that the government is expected to respond to the ongoing US-Iran conflict by stepping up interventions to stabilise the economy, particularly through measures aimed at ensuring the supply of critical inputs such as energy and fertilisers.
Subsidy spending may rise in FY27, reversing recent fiscal consolidation efforts that had reduced energy and fertiliser subsidies to about 1.5 per cent of GDP, as per the report. It noted that the government has set up a ₹1 trillion Economic Stabilisation Fund, which is likely to be used for additional subsidies and temporary tax relief measures to cushion businesses from 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,” it added.
The report stated that authorities may impose restrictions on exports of key inputs such as helium and sulphur to support domestic industries, including semiconductor manufacturing and fertiliser production, adding that sulphur is also an important ingredient for making fertilisers.
“We think the government will strive to minimise disruptions to the agriculture sector, which employs 43 per cent of India’s workforce. That said, export restrictions risk straining relations with trading partners and could prompt complaints in the World Trade Organization,” the report noted.
Separately, Moody’s Analytics in its latest Asia-Pacific outlook report said India’s unemployment rate is projected to rise marginally to 7 per cent in 2026 from 6.9 per cent in 2025, which is the highest among its peers in the region.
Additionally, inflation in India is expected to increase to 4.5 per cent in 2026 from 2.2 per cent in 2025, also the highest among its APAC peers, the Moody’s report showed, adding that the inflation rate will ease to 4.1 per cent in 2028.
India’s retail inflation, which had remained subdued for much of 2025, has begun to pick up in recent months, with the CPI rising from a low of around 0.25 per cent in October 2025 to 2.75 per cent in January 2026, and further to 3.4 per cent in March 2026.
Moody’s said that exports had supported growth over the past year, partly due to front-loading ahead of tariff hikes and the global boom in artificial intelligence (AI)-driven demand for electronics. It noted that the AI boom has helped sustain export momentum despite weakening domestic demand, with the gains initially concentrated in advanced chip producers before spreading to broader manufacturing segments.
However, it cautioned that the AI-driven expansion may be nearing a pause, amid rising prices, hardware shortages and elevated equity valuations. “Prices across a range of electronics have surged, and isolated shortages in several hardware segments have disrupted consumer markets,” it added.
Source: Business Standard
