The FY2027 Union Budget is set to be an interesting one, with the Government of India’s (GoI’s) focus shifting to debt consolidation over the medium term from annual fiscal deficit targets, as well as implementation of the 16th Finance Commission (FC) recommendations for the next five years. ICRA believes that the GoI’s fiscal deficit is likely to be capped at 4.3% of the GDP in FY2027 (nominal GDP growth est: +9.8%), marginally lower than the Budget Estimate (BE) of 4.4% for FY2026. We believe that the GoI will push up capital expenditure by ~14% (to Rs. 13.1 trillion), before fiscal rigidities in the form of higher committed expenditure set in from FY2028 on account of the 8th Central Pay Commission (CPC) recommendations on salary/pension revisions for Central Government employees/pensioners. Despite a mild dip in the fiscal deficit-to-GDP ratio, ICRA expects gross dated market issuances to rise sharply by 15-16% to Rs. 16.9 trillion, led by a surge in redemptions, although this may be tempered by switching of G-secs.

ICRA’s assessment for FY2026:

• GoI’s revenue receipts to trail the FY2026 BE by Rs. 0.5 trillion: This is mainly stemming from the expected shortfall of Rs. 1.3 trillion in net tax revenues over the BE, even as non-tax receipts are set to surpass the target by Rs. 0.8 trillion. On the other hand, revenue expenditure is projected to print Rs. 0.8 trillion lower than the BE of Rs. 39.4 trillion. We estimate the revenue deficit at Rs. 4.9 trillion in FY2026, mildly lower than the budgeted Rs. 5.2 trillion.
• Fiscal slippage unlikely in FY2026, if shortfall in receipts are matched by expenditure savings: ICRA has pencilled in some headroom to incur a higher-than-budgeted capital expenditure of Rs. 11.5 trillion (BE: Rs. 11.2 trillion). Accordingly, total expenditure may trail the target by Rs. 550 billion. Assuming a marginal miss in miscellaneous capital receipts, the fiscal deficit is likely to print at Rs. 15.7 trillion in FY2026 (4.4% of GDP), at par with the amount budgeted for the fiscal (4.4% of GDP).