Union Budget 2026-27: A Structural Shift in India's Fiscal Framework
The Union Budget for the fiscal year 2026-27, presented by Finance Minister Nirmala Sitharaman, marks a fundamental transformation in India's approach to fiscal management. Moving away from the traditional emphasis on fiscal deficit targets, the government has adopted the debt-to-GDP ratio as its primary fiscal anchor. This strategic pivot is designed to provide greater flexibility in spending during economic shocks while intensifying the focus on revenue performance and sustainable debt management.
Fiscal Deficit and Capital Expenditure Trends
In the latest budget, the government has set the fiscal deficit at 4.3% of GDP for 2026-27. This represents a reduction from 4.4% of GDP in the revised estimates for 2025-26 and 4.8% in 2024-25, marking a 10 basis-points decrease from the previous year. Consistent with post-pandemic trends, the budget continues to prioritize capital expenditure, with the Centre increasing allocation for capital outlay to ₹12.2 trillion, an 11.5% rise from ₹10.6 trillion in the previous fiscal's revised estimates.
However, as a share of nominal GDP, capital expenditure will remain flat at 3.1% of GDP, unchanged from the previous fiscal year and below the 3.2% recorded in 2024-25. This indicates a more modest approach compared to the significant increase from 1.6% of GDP in 2018-19 to 3.4% in 2023-24. Meanwhile, revenue expenditure, the other major spending component, continues its decline as a share of GDP, budgeted at 10.5% of GDP for 2026-27, down from 10.8% in the previous year's revised estimates.
The New Debt-to-GDP Anchor: Implications and Targets
Under the new fiscal framework, annual spending decisions are now guided by the total debt accumulated over the years. The government has committed to a medium-term goal of reducing the central government's debt-to-GDP ratio to 50%, with a 1% buffer on either side, by the fiscal year 2030-31. This target aligns with the 16th Finance Commission cycle, covering 2026-27 to 2030-31.
Current figures show the debt-to-GDP ratio at 55.98% for 2024-25, projected to edge up to 56.15% in 2025-26 (revised estimates), before moderating to 55.63% for 2026-27 (budget estimates). This stabilization follows a high of 60.84% in 2020-21, when the fiscal deficit overshot to 9.2% of GDP during the pandemic.
Revenue Projections and State Shares
Beyond headline figures, the government's gross tax revenues are projected at a modest 11.2% of total GDP for 2026-27. The sharing of revenue between the Centre and states shows the share of states budgeted at 34.7% of the Centre's gross tax collections, up from 34.2% in 2025-26. According to the 16th Finance Commission, the recommended share of states in central taxes for the 2026-31 period is 41%, consistent with the devolution recommended by the 15th Finance Commission for 2021-26.
This new fiscal framework reshapes how India balances spending flexibility, revenue pressure, and long-term sustainability, offering a more nuanced approach to economic management in the coming years.
