India's Budget 2026: Fiscal discipline guides measured growth strategy

India's Union Budget for FY27 is shaping up as a carefully calibrated exercise in fiscal restraint, with the Modi government expected to maintain its commitment to consolidation while navigating competing pressures for consumption revival and infrastructure investment.

Most economists anticipate the Centre will target a fiscal deficit of 4.2-4.3 per cent of GDP in FY27, representing a marginal improvement from the previous year. This measured approach signals policy continuity rather than aggressive fiscal expansion, reflecting India's position as a relative beacon of stability amid global economic uncertainty.

Global headwinds constrain fiscal flexibility

The budget framework emerges against a backdrop of persistent global economic fragility, characterised by elevated commodity prices, volatile bond markets and decelerating worldwide growth. While India maintains its status as an "island of stability", domestic fiscal manoeuvring room remains constrained.

SBI Research projects nominal GDP growth assumptions of 10.5-11 per cent for FY27, providing the foundation for the targeted fiscal deficit reduction. However, revenue generation faces headwinds, with JM Financial estimates suggesting tax collections in FY26 have fallen short by approximately ₹2-2.2 lakh crore, primarily due to weakened direct tax buoyancy.

Strategic capital expenditure priorities

Public capital expenditure remains the government's principal growth lever, though expansion rates are expected to moderate. SBI Research forecasts central government capex exceeding ₹12 lakh crore in FY27, implying roughly 10 per cent year-on-year growth. Emkay's more conservative base case projects 7 per cent growth, reflecting fiscal constraints.

Rather than broad-based spending increases, the budget is anticipated to prioritise sector-specific allocations. Railways, defence, power infrastructure, energy transition initiatives and manufacturing-linked projects are likely to receive enhanced funding. Conversely, roads and highways, previously significant beneficiaries, may experience relatively slower growth.

Borrowing dynamics and monetary coordination

Government borrowing requirements remain substantial, with SBI Research estimating net central borrowing at approximately ₹11.7 lakh crore in FY27. State governments are projected to add another ₹8-9 lakh crore in net borrowings.

Given this significant bond supply, economists expect the Reserve Bank of India to maintain active market intervention through open market operations, managing yields and liquidity as long-term rates face upward pressure.

Taxation stability expected

Following substantial personal income tax relief and GST rationalisation in FY26, experts anticipate minimal tax policy disruption. Personal income tax brackets and capital gains provisions are expected to remain unchanged, with possible incremental encouragement toward the new tax regime.

Disinvestment receipts are likely to remain modest, with asset monetisation continuing as a gradual process rather than a headline initiative.

Market implications

Equity strategists characterise the upcoming budget as market-neutral, unlikely to trigger significant rallies or sell-offs. Emkay Research describes it as a "continuity budget", where spending composition matters more than headline figures.

The overarching policy message emphasises macroeconomic stability, fiscal discipline and incremental reform. The government appears focused on preserving fiscal credibility while maintaining debt on a declining trajectory, supporting selected growth engines without overextending the balance sheet.

Budget 2026 represents restraint over reach, reflecting prudent economic management amid global uncertainty while positioning India for sustained, measured growth.