India's fiscal deficit may hit 4.5% of GDP
What's the story
India's fiscal deficit is projected to exceed the budgeted target, hitting 4.5% of GDP, research firm BMI said. The prediction comes as government policies responding to the ongoing West Asia conflict are likely to strain public finances. In its 2026-27 Budget, the government had estimated a fiscal deficit of 4.3%, slightly lower than the revised estimate of 4.4% for FY25-26.
Strategic measures
Potential input restrictions and export curbs
BMI expects the government to implement policies aimed at redirecting critical inputs to key industries, controlling business costs, and enhancing financial support for firms. The firm also anticipates possible restrictions on the exports of scarce inputs such as helium and sulfur, which are vital for semiconductor chip production. This is particularly important as sulfur is an essential ingredient in fertilizer production.
Cost control
Economic Stabilization Fund to contribute to fiscal expenditure
The government is also working to control cost increases for businesses impacted by the closure of the Strait of Hormuz, a major shipping route for natural gas and crude oil. To this end, an Economic Stabilization Fund worth ₹1 lakh crore has been set up. BMI estimates that this will contribute 0.1% of GDP to fiscal expenditure in FY26-27.
Financial impact
Rise in subsidies due to increased oil prices
Iran's control over the Strait of Hormuz has pushed oil prices sharply higher, with Brent crude trading close to $95 per barrel yesterday. BMI expects New Delhi to use the funds from the Economic Stabilization Fund for additional subsidies on energy and fertilizer products. The firm predicts that these subsidy amounts will rise in FY26-27 given their importance to India's economy.
Project postponement
Postponement of public infrastructure projects
To maintain total fiscal expenditure, the government may postpone some energy-intensive public infrastructure projects to the next fiscal year. This is in line with BMI's prediction that India's fiscal deficit would hit 4.5% of GDP. "We are maintaining this forecast while acknowledging rising upside risks," said BMI, noting that "the government's policy response to the Iran conflict could strain public finances."