We estimate the Centre’s FY27 fiscal deficit to exceed the Budget Estimate by ~Rs 1.2 lakh crore. It includes a loss of
Rs 1.1 lakh crore due to the Excise cut, an increase of Rs 90,000 crore in fertilizer subsidy and Rs ~48,000 crore in
petroleum/LPG subsidy. These are structural factors. In addition, there is also a new GDP base impact. We expect
because of structural issues and the new GDP base, the overall impact on FY27 budgeted fiscal deficit at 4.3% will be
an additional 40 bps. The impact of structural issues will be 0.32% of GDP plus 0.08% of GDP due to base revision and
hence revised Fiscal Deficit as per our calculation is 4.7% of GDP as per 2022-23 base. We believe an expenditure cut is
a likely option to contain the deficit ( average of Rs 45,000 crores in last 3 years)
We also expect a stronger cash balance to finance such a wider deficit without any increase in borrowing.
Alternatively, there could be further expenditure cuts to keep the deficit numbers in check. Our estimated cash
balance (adjusted with Core liquidity) as on end Oct’26 at ~Rs 8.5 lakh crore vs Rs 2.2 lakh crore at end Oct’25) and
we expect ~Rs 2.5 lakh crore by end Mar’27. It may be noted that budgeted borrowings by the Government is
already down by Rs 1.23 lakh crores because of switch and buybacks. Thus, the current borrowings are at Rs 15.97
lakh crores, against budgeted Rs 17.2 lakh crores.
For FY28, we discuss the option of abolition of LTCG (first raised in SBI ECOWRAP on Oct 12, Issue no 30) for all class of
investors and whether it is consistent with the fiscal glide path.
- Firstly, in the Budget documents, there are no official numbers published regarding LTCG tax collections. As per a
Lok Sabha reply on July 26, Government collected Rs 1.3 lakh crore of LTCG tax during FY25. However, there is a
catch. This bumper receipt in FY25 were because stock market offered ~30% return in the previous fiscal. So, FIIs
realized all their gains that accrued in FY24 to year FY25. Now let’s examine the current context. The last three
year average Nifty return is only 0.5% (FY25 to FY27-till date) and FIIs cumulative outflows is Rs 4.8 lakh crore.
Our model estimate suggests that around Rs 1 lakh crore LTCG would have been collected in FY26 and Rs
40,000-50,000 crore for FY27. We also believe that Government also budgeted a lesser amount for FY27. So, even
if we assume that if the Government decides to abolish LTCG tax the shortfall for FY28 will be only in the range
of Rs 40,000-50,000 crore / 0.1%-0.2%. We believe the Government would be able to take this hit if
hypothetically, the entire capital gains taxes were abolished.
- Secondly, What could be the several options for LTCG redemption?
- First, the exemption threshold should better reflect the widening retail investor base. Instead of a flat
threshold amount (currently Rs 1.25 lakh), an inflation-linked threshold may be beneficial for investors.
- Second, longer investment horizons could merit preferential treatment. For example, if assets held for
more than 2-3 years, the LTCG may be 0% as compared to 12.5% for 1-2 years.
- Third, LTCG taxation should be reviewed together with an increase in STT. If Government increase STT
by 50%, then around Rs 45,000 crore extra revenue will be generated in FY28. Also, if we introduce a
layered LTCG taxation structure, there will be an additional revenue generation also.
- Fourth, in line with sale of property, in MF redemption, Government can defer LTCG tax proportionately,
when the sale proceeds are reinvested in eligible equity MF within 90 days. This will help investors to shift
from low return MF to reasonable returns funds.
- Finally, we also strongly propose tax adjustments for bank deposits. Otherwise, the incentives for investment in
equities would significantly outweigh the incentives for investment in bank deposits.
- The threshold for tax exemptions on Savings deposit at Rs 10,000 may be reconsidered and raised to Rs
20,000- the revenue foregone comes around ~Rs 1,531 crore (flat RoI at 4%), leading to multiple benefits
viz. Stability in core deposit base, financial stability, better visibility of system liquidity against growing
digital payments and most importantly allowing banks to pass on the benefits accruing through low-cost
deposits to fund the humongous social commitments / sunrise sectors led demand in continuum.
- Term deposits, that have witnessed greater favor with savers with elevated rates attracting higher
proportions, may witness a revenue foregone figure of Rs 10,500 crore if current tax treatment across
maturity ladder is to be replaced by a simple flat 15% rate across all maturity. Combined revenue
foregone including both saving deposits and terms deposit thus comes around ~Rs 12,000 crore.
- Finally, we also propose a complete overall of National Testing Agency in the budget
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