Economic Outlook & Macro Trends
The Union Budget for FY2027 attempts to strike a balance between boosting growth and maintaining macroeconomic stability, while also initiating some important policy changes. The Government of India (GoI) has shifted its focus back to capex, with a target of Rs. 12.2 trillion for FY2027, implying a healthy 11.5% growth over the FY2026 RE, aided by a sizeable expansion in the outlay for the capex loan scheme. Including the grants-in-aid for the creation of capital assets, the GoI’s effective capex is up by a sharp 22%, which is expected to augur well for growth, although the onus of execution shifts to the states. Notably, the debt/GDP ratio has been pared to 55.6% in FY2027 BE from 56.1% in FY2026 RE, in line with its goal to align it to 50±1% by FY2031, although the upcoming release of the new GDP series (base year: 2022-23) could lower this ratio further, providing some fiscal headroom over the next five years. With this, there is a marginal fiscal compression, with the fiscal deficit pegged at 4.3% of GDP in FY2027 BE vs. 4.4% in FY2026 RE. Overall, the GoI has pencilled in mostly reasonable assumptions across revenue and expenditure targets, thereby lending credibility to the overall Budget math.
- FY2026 fiscal deficit target retained at 4.4% of GDP in RE, in line with BE: The GoI’s revenue deficit has been revised upwards slightly to Rs. 5.3 trillion in FY2026 RE from Rs. 5.2 trillion in the BE, with the undershooting in revenue receipts (-Rs. 0.78 trillion) marginally outweighing the compression in revex (-Rs. 0.75 trillion). However, with a shortfall in the capex target (-Rs. 0.3 trillion), the fiscal deficit for FY2026 narrowed slightly to Rs. 15.6 trillion from the BE of Rs. 15.7 trillion. Despite somewhat higher nominal GDP print in FY2026 (RE: Rs. 357.1 trillion vs. BE: Rs. 357.0 trillion), the fiscal deficit in FY2026 RE has been retained at 4.4% of GDP, similar to the budgeted target, and in line with ICRA’s expectations.
- GoI’s debt/GDP ratio curtailed at 55.6% in FY2027 BE: The GoI has stuck to its commitment of a shift in the fiscal anchor to medium-term debt consolidation away from annual fiscal deficit targets and has pegged the Central Government debt at 55.6% of GDP in FY2027 (56.1% in FY2026 RE). While the pace of consolidation is lower than anticipated, the upcoming release of the new GDP series (base year: 2022-23 vs. current: 2011-12) may alter this ratio, and bring it closer to the goal of 50±1% by FY2031. This could lead to a shallower debt consolidation trajectory over the next five years, creating some fiscal headroom.
Exhibit 1: Trends in GoI’s Key Fiscal Balances
$ Net of Refunds, Net of States’ share in Central Taxes; ^Recovery of loans and disinvestment receipts; BE: Budget Estimate; RE: Revised Estimate; Source: GoI Budget Documents, CGA, ICRA Research
