India’s fiscal roadmap for the coming year is likely to balance restraint with expansion, as the government targets a lower deficit while continuing to invest
heavily in infrastructure. Ratings agency ICRA, in its pre-Budget assessment released on Friday, indicated that the fiscal deficit for the financial year beginning April 2026 is expected to be fixed at 4.3 per cent of gross domestic product (GDP), alongside double-digit growth in capital expenditure.
According to ICRA, the current fiscal year is likely to see a gap of nearly Rs 1.3 lakh crore in net tax revenues. At the same time, non-tax receipts are expected to outperform expectations, exceeding the 2025–26 Budget estimates by around Rs 80,000 crore. This divergence between tax and non-tax income highlights the challenges facing the exchequer even as overall fiscal discipline remains intact.
ICRA noted that expenditure management will be critical in keeping the government’s finances on track. “Fiscal slippage unlikely in FY2026, if shortfall in receipts is matched by expenditure savings,” the agency said, underlining that prudent spending controls could offset weaker-than-expected revenues.
Budget 2027: A Shift Toward Medium-Term Discipline
Looking ahead, ICRA described the FY2027 Union Budget as particularly significant. Rather than focusing narrowly on year-by-year deficit targets, the government is expected to place greater emphasis on medium-term debt consolidation. This shift will coincide with the rollout of recommendations from the 16th Finance Commission, which will shape fiscal transfers and priorities for the next five-year period.
ICRA estimates that the fiscal deficit could be capped at 4.3 per cent of GDP in FY2027, assuming nominal GDP growth of about 9.8 per cent. This would represent a modest improvement from the Budget Estimate of 4.4 per cent projected for FY2026, reinforcing the government’s gradual consolidation strategy.
Capital Expenditure Push Before Future Constraints
Despite tighter fiscal parameters, public investment is unlikely to slow. ICRA expects the government of India to increase capital expenditure by around 14 per cent to Rs 13.1 lakh crore in FY2027. This push is seen as a window of opportunity before fiscal pressures intensify later in the decade.
From FY2028 onwards, higher committed spending is expected to kick in, largely due to the anticipated implementation of the 8th Central Pay Commission’s recommendations on salary and pension revisions for central government employees and pensioners.
Borrowing Needs Set To Rise
Even with a lower deficit-to-GDP ratio, ICRA projects that gross dated market borrowings will climb sharply. Issuances are estimated to rise by 15–16 per cent to about Rs 16.9 lakh crore, driven primarily by a spike in redemptions. However, the impact on markets could be partly softened through government securities switching operations.
