India's Fiscal Policy Set for Major Shift from FY27
India's fiscal policy is expected to become less contractionary starting from the financial year 2027. This change comes as the central government prepares to move away from its current focus on fiscal deficit targets. Instead, it will adopt a broader debt sustainability framework. BofA Securities highlighted this significant shift in a pre-Budget note released ahead of the Union Budget presentation.
Budget Presentation and Fiscal Deficit Targets
The Finance Minister will present the Union Budget for FY2026-27 on February 1. The central government appears likely to meet its FY26 fiscal deficit target of 4.4% of GDP. BofA Securities projects a modest reduction in the deficit to 4.3% of GDP in FY27. This signals a pause in aggressive fiscal consolidation efforts. The government now aims to maintain fiscal support in line with economic growth patterns.
Stronger capital expenditure execution in FY26 has provided the government with valuable fiscal headroom. Lower energy prices have also helped contain subsidy outgo. Capital spending is expected to rise broadly in line with nominal GDP growth. BofA estimates nominal GDP growth will rebound to 10.1% year-on-year in FY27. This approach ensures fiscal policy does not become a drag on economic activity.
Move to a Debt Targeting Framework
A key structural shift anticipated from Budget 2026 is the adoption of a debt-targeting framework. The government is expected to aim for a central debt-to-GDP ratio of 55%. This represents a decrease from an estimated 56.1% in FY26. This move follows the achievement of the earlier commitment to keep the fiscal deficit below 4.5% of GDP.
BofA Securities stated this shift would make the fiscal position less contractionary while maintaining fiscal sustainability. It ensures government spending rises broadly in sync with the nominal growth cycle. The policy will not act as a drag on economic activity under this new framework.
Revenue Projections and Collection Trends
On the revenue front, the brokerage expects FY26 collections to undershoot Budget Estimates by around 2%. This shortfall is largely due to personal income tax and GST cuts implemented recently. However, this pressure is likely to be partly offset by a surge in non-tax revenues.
Specifically, dividends from the Reserve Bank of India and public sector enterprises will provide significant support. BofA estimates RBI dividend payouts at around ₹2.9 lakh crore. The brokerage sees scope for revenue growth of 10.7% year-on-year. This growth will be aided by reasonable increases in direct taxes, a mild recovery in GST collections, and higher provisions for dividends and divestment inflows.
With these factors in play, BofA expects the overall revenue-to-GDP ratio to rise modestly to 9.6% in FY27 from 9.5% in FY26. Savings from the phased-out GST compensation cess, estimated at ₹35,000 crore in FY26, are also expected to provide additional fiscal support.
Expenditure Priorities and Sector Focus
In terms of expenditure priorities, defence and capital spending are likely to remain key focus areas. BofA sees FY27 capital expenditure rising to ₹12.5 lakh crore, which represents 3.2% of GDP. Strategic sectors such as defence, railways, and shipbuilding will continue to attract higher allocations.
In contrast, spending on roads, housing, and rail projects may remain relatively subdued. The brokerage does not expect provisioning for the Eighth Pay Commission in FY27. Implementation of the pay commission recommendations is likely to begin in FY28 instead.
Divestment Targets and Funding Strategies
Divestment is expected to play a larger role in bridging funding gaps. While FY26 disinvestment receipts have lagged behind expectations, BofA expects the FY27 divestment target to be doubled to ₹80,000 crore. This reflects increased reliance on non-tax and non-debt capital receipts.
The proposed IDBI Bank stake sale will contribute significantly to these divestment targets. This strategic shift demonstrates the government's commitment to exploring diverse revenue streams beyond traditional taxation.
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