Capex cuts to offset tax shortfalls, Govt on track for fiscal targets of FY26: Goldman Sachs

New Delhi [India], December 2 : The Central government is expected to meet its fiscal deficit target for FY26 by cutting back on capital expenditure to offset potential shortfalls in income tax and GST collections, according to a report by Goldman Sachs.

The report highlighted that central government capex contracted sharply in October, declining by around 28 per cent year-on-year. This fall was mainly due to lower capex transfers to states, even as defence capex continued to remain strong.

It stated, "We continue to expect the central government to meet its fiscal deficit target of 4.4 per cent of GDP for FY26 by reducing expenditure (likely capex), to offset potential income tax and GST shortfalls".

In contrast, current expenditure rose sequentially because of higher interest payments, though it stayed lower compared with the same month last year.

On the receipts front, direct taxes declined sequentially due to lower income tax and corporate tax collections. GST collections also contracted, following recent rate reductions, and are expected to remain subdued in the coming months.

Despite these pressures, Goldman Sachs said it continues to expect the Centre to achieve its fiscal deficit target for FY26 by reducing expenditure.

According to the report, the fiscal deficit for April-October 2025 stood at 4.0 per cent of GDP (GSe), compared with the budget estimate (BE) of 4.4 per cent for the full year.

The deficit reached 52.6 per cent of the total budgeted deficit for FY26, marking the lowest level since 2011, excluding the pandemic years of FY21 and FY22.

Direct tax receipts contracted 1.2 per cent month-on-month, mainly due to weaker income tax collections, which grew 27 per cent year-on-year but fell 23 per cent month-on-month. Corporate tax collections also contracted sequentially because of a high base in the previous month.

Indirect tax collections contracted by 5.0 per cent year-on-year (-3.3 per cent month-on-month), driven by lower GST receipts following the implementation of reduced GST rates that came into effect in the last week of September.

The report said these trends reinforce the expectation that expenditure rationalisation, particularly of capex, will play a key role in keeping the fiscal deficit within the targeted 4.4 per cent of GDP for FY26.

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