India’s Fiscal Deficit At 4.6% In FY27 Despite 4.3% Target: BMI Forecast

A widening of our expected deficit to 4.6% of GDP in FY27 now exceeds the government’s FY27 target of 4.3%, due to lower revenue receipts post reforms, as well as higher expenditures on defence outlays, especially in infrastructure,” BMI, a Fitch Solutions company, pointed out.

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Revenue Constraints: The Cost of Reforms

The report indicates that tax revenue is projected to encounter significant challenges in the upcoming fiscal year, primarily owing to the aggressive tax rationalisation measure introduced during 2025. According to BMI, the GST Reforms 2.0, which came into effect from September 2025, has been identified as one of the major factors hurting revenue. This has involved the consolidation of the Goods and Services Tax structure into three principal rates: 5%, 18%, and 40%. This has resulted in moving most necessities from the 12% group to the 5% group. The primary aim was to boost consumer demand and mitigate inflation, but it has resulted in the governments’ reduced indirect tax receipts.
Moreover, in addition to this, the latest reduction in income taxes to ease the burden on the middle class is estimated to have created what amounts to about ₹1 lakh crore in lost revenue. Further, it is highlighted in the report that upcoming changes in customs duty in the upcoming Union Budget will make it even more difficult for the country to consolidate its fiscal position through enhanced revenue.

Pressures of Spending: Infrastructural and SME

To have a developed India, it has to go on committing funds into projects and supporting SMEs. This emphasis on growing a developed India, according to BMI, includes large investments in infrastructure and SMEs. This report also indicates that in the past, measures to cut expenditures have seen the capital expenditure to GDP ratio decrease. This could have to be reversed if it has to maintain growth.

Geopolitical Factors Behind Defence Expenditure

One of the notable features, within the study conducted by BMI, is its emphasis on what it refers to as the dangerous external environment facing India. It is postulated that New Delhi would have to deviate from its fiscal policies to support its defense spending requirements.
It refers to the military modernisation efforts that China is undertaking, pointing out that its 2025 military budget represents a 7.2% increase to a level that exceeds $245 billion—nearly triple what is allocated to India. It further draws attention to the efforts that Pakistan is making to develop its air force.
For perspective, even India’s FY26 defence budget broke all records at an historic high of ₹6.81 lakh crore. Still, according to BMI, this amount is likely to require another sharp increase in FY27 to maintain credible deterrence levels, leaving even less scope for expenditure reductions.

Fiscal Consolidation Path

The difference between the target of 4.3% probably set by the government and the projection of 4.6% by BMI aptly captures the challenges of adhering to a tight fiscal glide path when strategic imperatives conflict. The implication of the projection is that while the government is determined to remain prudent in its spending, the combination of rationalisation of the taxation system and some unavoidable increases are expected to breach the target for the deficit.