Rating agency ICRA has outlined its expectations for the Union Budget 2026-27. The government will likely prioritize medium-term debt consolidation while maintaining a strong push for capital expenditure. This upcoming Budget carries added significance as it marks the first alignment with the 16th Finance Commission's recommendations. These recommendations will determine fiscal transfers between the Centre and states for the next five-year period.
Fiscal Deficit and Debt Projections
ICRA expects the Centre's fiscal deficit to be capped at approximately 4.3% of GDP for 2026-27. This figure is slightly lower than the 4.4% budgeted for 2025-26. An estimated 9.8% growth in nominal GDP will support this reduction. On this trajectory, the Centre's debt-to-GDP ratio should ease from 56.1% in 2025-26 to about 55.1% in 2026-27. This decline aligns with the medium-term consolidation path.
However, in absolute terms, the fiscal deficit is expected to rise to Rs 16.9 trillion in 2026-27 from Rs 15.7 trillion in 2025-26. Higher capital expenditure primarily drives this increase.
Capital Expenditure Focus
The government is likely to front-load infrastructure spending before fiscal rigidities increase from 2027-28 onwards. Implementation of the 8th Central Pay Commission during that period will raise salary and pension liabilities, creating those rigidities. ICRA believes the Government of India will push up capital expenditure by around 14% to Rs 13.1 trillion. This move comes before higher committed expenditure sets in from FY2028.
Capital expenditure is projected to rise to Rs 13.1 trillion, or 3.3% of GDP, from an estimated Rs 11.5 trillion in 2025-26. This increase will support investment activity and improve the quality of government spending.
Revenue and Expenditure Outlook
Tax Revenue Growth
On the revenue side, gross tax revenues should grow by around 7% in 2026-27. Direct taxes will lead this growth with an 11% rise. Indirect tax growth may remain muted at about 2% following GST rate cuts from September 2025. After devolution to states, net tax revenues are projected to increase by 5.2% to Rs 28.5 trillion.
Controlled Revenue Expenditure
Revenue expenditure growth is expected to stay contained at around 4%. This containment will help the revenue deficit narrow to Rs 4.7 trillion, or 1.2% of GDP. This level represents the lowest revenue deficit in nearly two decades.
Market Borrowings and Budget Timeline
Gross market borrowings are projected to rise by 15–16% to Rs 16.9 trillion in 2026-27. Higher capital spending and increased debt redemptions contribute to this increase. The Union Budget for 2026-27 is scheduled for presentation in Parliament on February 1, 2026.
