Steady growth, tight purse: Why FY27 Budget may prioritise capex over populism

Even as India is fast on its way to becoming the world’s third-largest economy, the current economic backdrop, shaped by geopolitical tensions and global trade uncertainty, calls for a steady, growth-supportive stance in the FY27 Union Budget.

Analysts project the FY27 gross fiscal deficit (GFD) at 4.3 per cent of GDP, reflecting a slower pace of fiscal consolidation, sustained capital expenditure momentum, particularly in defence and loans to states, and modest tax buoyancy supported by a large RBI surplus transfer. Borrowing is expected to remain elevated, as sizeable redemptions could exert upward pressure across the

yield curve.

Fiscal consolidation is likely to ease under the Centre’s debt-to-GDP target of 50±1 per cent by FY31, implying a gradual annual GFD/GDP reduction of 10–20 basis points. ICRA has projected FY27 GFD/GDP at 4.3 per cent, backed by tax revenue growth of 9 per cent, expenditure growth of 6 per cent and non-tax revenue growth of 4 per cent. Following income tax relief and GST rate cuts in the previous fiscal, and given prevailing fiscal constraints, the scope for a large fiscal stimulus in the forthcoming Budget appears limited.

That said, some buoyancy in receipts could support the fiscal position. Gross tax revenue growth of 9 per cent in FY27 is expected to be driven by 11 per cent growth in corporate taxes and 12 per cent growth in personal income taxes, aided by 10–10.5 per cent nominal GDP growth, stronger corporate earnings and moderate wage gains. GST and excise collections are also likely to remain strong, reflecting higher taxes on tobacco.

The RBI’s surplus transfer is estimated at Rs2.9 trillion, supported by continued strength in foreign and domestic receipts. Analysts also expect a marginal increase in devolution to states, factoring in the probable recommendations of the 16th Finance Commission. If the devolution ratio remains unchanged, this could add an upside of Rs800 billion to revenues.

With limited room for populism, the emphasis should remain firmly on capital expenditure. Given the multiple fiscal measures already announced in FY26, the likelihood of additional measures in the ensuing Budget appears low. Moreover, with committed expenditure accounting for around 60 per cent of revenue expenditure, room for outright populism is constrained without putting pressure on fiscal metrics.

While several states have pivoted towards populist spending, the Centre has remained measured. It is therefore prudent to preserve fiscal space for the implementation of the 8th Pay Commission, likely in FY28. Experts estimate revenue expenditure growth at 5 per cent and capex growth at 9 per cent, with a continued focus on defence spending and loans to states for

capital investment.

However, a note of caution is warranted. A slower pace of fiscal consolidation could weigh on the bond market. If equity markets are disappointed by the absence of large-scale spending measures, bond markets may also remain uneasy over a potential rise in market borrowings.

Gross government securities (G-Sec) borrowing could be higher than usual at around Rs16 trillion, driven by large redemptions, along with net G-Sec borrowing of Rs12 trillion and around Rs1 trillion in Treasury bills. This could add further pressure across the yield curve.