By Manoj Kumar and Nikunj Ohri
NEW DELHI, April 7 (Reuters) - India sees no immediate risks to its fiscal deficit target for the financial year that began on April 1, and will continue to prioritise capital spending, two government sources said, as New Delhi assesses the fallout from the Middle East crisis.
Officials are considering austerity measures, including spending curbs in ministries with limited capacity to use allocated funds, but are keen to continue spending on roads, railways and airports,
which the government sees as critical to sustaining growth and creating jobs, the two sources said.
India, in February, said it would aim for a fiscal deficit of 4.3% of GDP for the current 2026/27 financial year, down from 4.4% last year.
But the Iran war has sent oil prices soaring, putting a burden on the finances of India's federal government, which has already cut excise duties to prevent a pass-through of higher fuel costs to consumers.
Economists expect the government may not be able to meet its fiscal goals, with Standard Chartered expecting a slippage of 0.7-0.9 percentage points of GDP.
One of the government officials cited above said the budget projections would not be immediately revised.
"For India to revise its budget projections, the current situation would need to persist for at least two to three months," one of the sources said.
The sources didn't provide details about the scale of any austerity measures.
The finance ministry did not immediately respond to an emailed request for comment.
HIGHER SPENDING BURDEN
The government is likely to face higher spending on fertilisers and petroleum subsidies, budgeted at 1.83 trillion rupees ($19.69 billion) for 2026/27, as global commodity prices rise, the officials said.
Also, the government will lose revenue because of a cut in excise duties on fuel products.
The government is unlikely to fully pass on higher crude oil prices to fuel consumers, partly because of opposition from states, one of the sources said, making any sharp increase in pump prices unlikely amid state assembly elections.
Four large Indian states will go to the polls between April 9 and April 29, with three ruled by opposition parties, raising the political risks of fuel price hikes.
Some of the additional spending will be offset by better targeting of subsidies and savings by ministries on schemes, the second source said, adding that capital spending "remains the top priority of the government."
The federal government's capital spending is budgeted to rise to 12.22 trillion rupees ($131.45 billion), or about 4.4% of GDP, in the current fiscal year, up from revised spending of 10.96 trillion rupees ($117.90 billion) in 2025/26, according to the annual budget.
($1 = 92.9600 Indian rupees)
(Reporting by Manoj Kumar and Nikunj Ohri, Editing by William Maclean)
