Rating agency ICRA has shared its pre-Budget expectations ahead of the Union Budget for the next financial year. The agency predicts the government will target a fiscal deficit of 4.3 percent of GDP in FY2027. This figure represents a slight reduction from the current year's Budget Estimate of 4.4 percent.
Key Fiscal Projections for the Coming Year
ICRA bases its forecast on an assumed nominal GDP growth rate of 9.8 percent. The agency notes that maintaining this deficit target is crucial for fiscal stability. It also highlights that a shortfall in net tax revenues this year could be offset by savings in expenditure.
Capital Expenditure to See Strong Growth
The government is likely to increase capital expenditure significantly. ICRA expects a 14 percent rise, bringing the total to Rs 13.1 lakh crore in FY2027. This continued double-digit growth in spending on infrastructure and development projects underscores the government's commitment to economic expansion.
However, challenges loom on the horizon. From FY2028 onwards, fiscal pressures are expected to intensify. This is primarily due to higher committed expenditures linked to the recommendations of the 8th Central Pay Commission. Salary and pension revisions for central government employees will increase the financial burden.
Market Borrowings Set to Rise
Despite the projected improvement in the deficit-to-GDP ratio, gross dated market borrowings are forecast to jump sharply. ICRA projects an increase of 15 to 16 percent, reaching approximately Rs 16.9 lakh crore in FY2027.
The main driver for this rise is higher redemptions of existing securities. The agency suggests that the government could partially offset this increase through switching operations in the government securities market.
A Shift in Fiscal Focus
ICRA emphasizes that the FY2027 Budget will be particularly significant. The government's focus is expected to shift from annual deficit targets to a broader strategy of medium-term debt consolidation. This strategic pivot will occur alongside the rollout of recommendations from the 16th Finance Commission, which will guide fiscal policy for the subsequent five years.
The agency's analysis points to a careful balancing act. The government aims to support growth through robust capital spending while navigating future fiscal rigidities and managing its borrowing program effectively.
