Centre May Step Up FY26 Capex by ₹80,000 Cr as RBI Windfall, GDP Boost Open Fiscal Space: ICRA

New Delhi: The Indian government may have more elbow room in its finances than earlier expected. Backed by stronger nominal GDP figures and a record payout from the Reserve Bank of India, the Centre could potentially raise its expenditure by a hefty ₹80,000 crore in FY2026 without veering off its fiscal roadmap, according to an assessment by credit ratings agency ICRA.

If that entire sum is channeled into capital expenditure, it would take the government’s total capex outlay to ₹12 lakh crore for the year — a sharp step-up from the ₹11.2 lakh crore outlined in the Union Budget. That would represent a growth rate of 14.2%, more than double the budget’s current projection of 6.6%.

Fiscal Deficit Held in Check

The latest fiscal data offers some reassurance. For FY2025, the government’s fiscal deficit stood at ₹15.8 lakh crore, only marginally above the Revised Estimate of ₹15.7 lakh crore. The modest overshoot, ICRA noted, was largely due to higher-than-planned capital spending and a shortfall in non-debt capital receipts. But the revenue deficit turned out to be smaller than forecast, helping limit the overall gap.

As a share of the economy, the deficit was contained at 4.8% of GDP — right in line with the government’s target. This was made possible by stronger-than-expected nominal GDP figures in the provisional estimates, which helped smoothen the fiscal math.

Looking ahead to FY2026, ICRA believes that even with a slower nominal GDP growth of 9%—lower than the 10.1% forecast in the Budget — the government should be able to keep the fiscal deficit within the target of 4.4% of GDP.

Early Trends Signal Room to Maneuver

The government’s April accounts offer a glimpse into its fiscal momentum at the start of the new financial year. The fiscal deficit for the month came in at ₹1.9 lakh crore — about 12% of the full-year budget estimate — compared to ₹2.1 lakh crore in the same month last year. That decline was mainly driven by a lower revenue deficit and a pickup in capital receipts.

At the same time, capital spending surged 61% year-on-year in April, underscoring the Centre’s early push on infrastructure and public investment. This sharp jump was absorbed without putting pressure on the deficit, thanks to stronger receipts.

RBI Dividend Lifts the Tide

The real boost, however, came from the Reserve Bank of India. Its record ₹2.7 lakh crore dividend payout to the Centre has opened up significant fiscal space. According to ICRA’s calculations, this alone gives the government a cushion of around ₹40,000 crore.

In addition, data from the Controller General of Accounts shows that miscellaneous capital receipts — which include disinvestment proceeds and asset monetisation — touched 46% of the full-year target of ₹47,000 crore in just the first month of FY2026. That’s a strong early signal, suggesting the government may outperform on this front.

There’s also scope to further raise excise duties on fuel, should the need arise. In April, the Centre hiked petrol and diesel duties by ₹2 per litre — a move that was largely absorbed by the market due to soft global oil prices. With crude prices still subdued, analysts believe there’s room for more without triggering inflationary concerns.

What It Means for Growth and Policy

If the government does choose to deploy the entire ₹80,000 crore headroom for capex, it could have meaningful economic consequences. Public investment has a high multiplier effect, and a stronger push on infrastructure could crowd in private investment, create jobs, and support rural demand — especially as global growth remains uneven.

But the decision isn’t just economic; it’s also political. With several state elections on the horizon, the Centre may need to balance between stepping up development spending and addressing welfare demands. A portion of the fiscal cushion could end up funding subsidies or social schemes, depending on evolving priorities.

That said, the overall fiscal picture remains much more comfortable than it did a year ago. “The combination of higher-than-expected GDP, strong RBI surplus, and solid early receipts gives the government more options — without compromising its fiscal discipline,” said a senior economist at a Mumbai-based financial services firm.

ICRA’s report doesn’t speculate on how the funds might be used. But it does stress that the fiscal deficit target for FY2026 is achievable, even with additional spending.

Outlook: A Window of Opportunity

The big takeaway from ICRA’s findings is that India’s fiscal landscape is looking steadier — and more flexible. The government can, if it chooses, stretch its spending a little further without jeopardising its fiscal consolidation goals.

Of course, how that cushion is used remains to be seen. But for now, the numbers offer a rare luxury in public finance: room to manoeuvre. And in a world where fiscal space is shrinking for many economies, that’s no small achievement.

Written by Arpit T. | Published on 3 June 2025 | Source: ICRA Report

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