- Positive strides in India’s fiscal health were attested by a rating upgrade last year.
- The debt-to-GDP ratio will be the primary anchor for the FY27 Budget, aligned to deficit goals.
- Gross borrowing is poised to rise to a fresh high, factoring in redemptions and potential switches.
- We expect Budget measures to align with the economy’s strategic ambitions, ..
- … including on manufacturing and social welfare.
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India’s fiscal health has strengthened post-pandemic, with the central government’s deficit halving in this timeframe. A testament to this confidence, S&P upgraded India’s outlook and sovereign rating after nearly 18 years in 2025. We expect this trend to continue, albeit the pace of aggressive consolidation is likely to moderate.
FY26 run rate necessitates expenditure rationalisation
We don’t expect a compromise in meeting the FY26 fiscal deficit target, with a shortfall in tax collections likely to be compensated by a recalibration in spending outlays.
Firstly, the impact of the prevailing sub-9% nominal GDP vs. the budgeted 10.1% for FY26 on the fiscal math will be minimal. The First advance GDP growth estimate at 7.4% was near street expectations, capturing data up to Nov25-early Dec25, lending upside bias to the second reading/actual release, as in the past. Secondly, the Apr-Nov25 (8MFY26) deficit was wider than the corresponding period last year. The 8MFY26 deficit reached 62.3% of the annual target, compared to 52.5% at the same time in FY25. Next, net tax receipts are on course to miss budgeted estimates due to the GST rate rationalisation measures, direct tax relief, and lower tax buoyancy on the back of weaker nominal growth (see chart). Fourth, expenditure compression will also be a crucial part of the balancing math.
FY27 targets to align debt with deficit levels
Key factors for the FY27 Budget will include:
Debt to GDP ratio will be the primary anchor, i.e., aiming to lower the Centre’s debt to 50% of GDP by FY31 from ~56.1% in FY26, aligned with the deficit targets. This compares with the previous practice of setting a specific deficit target.
For our base case, nominal GDP growth is assumed at 10% yoy, compared to a revised ~8.0-8.3% in FY26 (see table for details).
We don’t expect any surprise tax announcements in the Budget presentation.
Given the improvement in the nominal GDP, tax buoyancy is also set to improve.
Centre’s capex budget in FY27 to stay around 3.0-3.1% of GDP, up ~7-8% yoy from FY26, with an emphasis on identifying shovel-ready and greenfield projects.
We expect a small moderation in revenue expenditure, with the proportion likely to moderate from 10.8% of GDP (FY26 RE) to 10.7% of GDP in FY27 BE.
While outside the remit of the budget, state finances will be an important watch factor. On a related note, the country is heading into a busy period for state elections in 1H26, with Tamil Nadu, West Bengal, Puducherry, Kerala, and Assam heading to the polls in May-June 2026.
The size of borrowings will be an important consideration for the bond markets. Given our underlying math and deficit target, we expect FY27 net borrowings to rise to INR 12trn (vs ~INR 11.4trn in FY26), which amounts to ~73% of the deficit next year (see second chart).
Budget agenda – align with strategic objectives
Tracking the government’s move to expedite reforms and oil domestic engines in the past year, we expect the FY27 Union Budget to back strategic priorities and expand the role of ‘new economy’ sectors. Admittedly, affirmative action will continue outside the budget schedule as well.
First is to continue with higher capex outlays towards infrastructure into railways, roads and highway, defence and transfers to states (these make up ~80% of effective capex), just as private investments, on aggregate, remain uneven and face global uncertainty. Second, prioritise strategic sectors, including defence, semiconductors, electronics, renewable energy, artificial intelligence/ robotics, etc. Budget allocations towards the defence sector have targeted modernisation and the expansion of indigenous manufacturing capacity, with indications of a double-digit increase in the FY27 Budget. The aggregate share of manufacturing as % of GDP has yet to improve materially, even as certain segments have expanded their market share. In addition to stimulus, the strategy will also focus on improving competitiveness.
Next, ironing out governance issues will be prioritised via a focus on deregulation and decriminalisation to identify and eliminate redundant or outdated compliance obligations in key sectors, via a bottom-up approach. While the formation of the official Deregulation Commission announced in last year’s budget appears to still be waiting in the wings, other high-level committees have sought to address these issues, including involving states to address concurrent subjects like land and labour. We’ll await further details on the proposed commission, which would ideally have representation from all key stakeholders especially from the private sector and regulators. Lastly, ground-up support for the domestic priority sectors is bound to continue - four key priority groups, Gareeb (poor), Yuva (youth), Annadata (farmers) and Naari (women) – referred to as GYAN segments, are likely to be in the forefront of social assistance and development programs.
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