India Fiscal Deficit May Rise Beyond Target to 4.5% in FY27: Fitch Report

India’s Fiscal Deficit may reach 4.5% of GDP in FY27, exceeding the budgeted 4.3%, according to BMI, a unit of Fitch Solutions.  

The estimate is indicative of higher spending linked to subsidies and policy measures aimed at managing external pressures. 

Subsidy Burden Likely to Rise 

Subsidy spending is expected to increase after declining in recent years, when energy and fertiliser subsidies had fallen to around 1.5% of GDP.  

A ₹1 trillion Economic Stabilisation Fund has been set up and may be used to fund additional subsidies and short-term tax relief. 

In the second quarter of 2026, customs duties were removed on selected petrochemical products. This is expected to ease costs for sectors such as pharmaceuticals, textiles, paints and toys. 

Supply Management and Trade Risks 

The government may take further steps to secure supplies of key inputs such as energy and fertilisers, particularly amid the US-Iran conflict.  

Export restrictions on helium and sulphur are being considered to support domestic industries, including semiconductor manufacturing and fertiliser production. 

Sulphur remains a key input for fertilisers, and supply stability is seen as important for agriculture, which employs about 43% of the workforce. However, such restrictions could lead to trade-related issues at the World Trade Organization. 

Inflation and Unemployment Trends 

According to Moody's Analytics, India’s Unemployment rate is projected to rise to 7% in 2026 from 6.9% in 2025. Inflation is expected to increase to 4.5% in 2026 from 2.2% in 2025, before easing to 4.1% by 2028. 

Retail inflation has moved up in recent months, rising from about 0.25% in October 2025 to 3.4% in March 2026. 

Export Growth and Emerging Constraints 

Exports supported growth over the past year, helped by shipments ahead of tariff increases and demand linked to artificial intelligence-driven electronics. This demand extended from advanced chip production to manufacturing segments. 

The report notes that this trend may moderate due to higher prices, hardware shortages and elevated valuations affecting demand. 

Read More: Fake News Alert: MoPNG Denies Reports of Petrol and Diesel Price Hike! 

Conclusion 

Higher subsidy spending and policy responses to external developments are expected to add pressure on public finances, increasing the likelihood of the fiscal deficit exceeding its FY27 target. 

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