India’s fiscal policy is expected to be less contractionary from FY27 as the Center prepares to pivot from a fiscal-deficit-focused approach to a debt sustainability framework, brokerage BofA Securities has noted in a pre-Budget note.
The shift, which will greater flexibility in public finances, comes as the government remains on track to meet its medium-term fiscal consolidation targets despite slower nominal GDP growth and sweeping tax cuts.
Finance minister Nirmala Sitharaman is set to present the Union Budget for FY2026-27 on 1 February, with the central government likely to meet its FY26 fiscal deficit target of 4.4% of GDP. BofA projects a modest reduction in the deficit to 4.3% of GDP in FY27, signaling a pause in aggressive consolidation and a move towards maintaining fiscal support in line with economic growth.
mint reported Monday that Morgan Stanley expects fiscal deficit at 4.2% of GDP in FY27—marking the shallowest pace of consolidation since FY23.
According to the BofA report, stronger capital expenditure execution in FY26, combined with lower energy prices that helped contain subsidy outgo, has provided the government with fiscal headroom. Capital spending is expected to rise broadly in line with nominal GDP growth, which BofA estimates will rebound to 10.1% year-on-year (YoY) in FY27. This, the brokerage said, would ensure that fiscal policy does not become a drag on economic activity.
Move to a debt targeting framework
A key structural shift anticipated from Budget 2026-27 is the adoption of a debt-targeting framework when India will target the debt-to-GDP ratio as its primary fiscal anchor, offering greater flexibility in public finances.
The government is expected to aim for a central debt-to-GDP ratio of 55%, down from an estimated 56.1% in FY26, after achieving its earlier commitment of keeping the fiscal deficit below 4.5% of GDP. The Centre’s liabilities were at 63% in 2020-21.
“This would make the fiscal position less contractionary, but maintain fiscal sustainability, ensuring spending rises broadly in sync with the nominal growth cycle, and not a drag on economic activity,” BofA Securities said.
The overall government debt situation is also reassuring: at 81.5% of GDP, India’s general government debt (centre plus states) is comparable to that of other emerging economies, and lower than major advanced economies.
Revenue projections to undershoot
On the revenue front, the brokerage expects FY26 collections to miss Budget estimates by around 2%, largely due to the cuts in the rates of personal income tax and good and services tax. However, this pressure is likely to be partially offset by a surge in non-tax revenues, particularly dividends from the Reserve Bank of India (RBI) and public sector enterprises.
BofA estimates RBI dividend payouts at around ₹2.9 lakh crore and sees scope for revenue growth of 10.7% YoY, aided by reasonable growth in direct taxes, mild recovery in GST and higher provisions for dividends and divestment inflows.
With this, it expects the overall revenue-to-GDP ratio rising modestly to 9.6% in FY27 from 9.5% in FY26. Savings from the phased-out GST cess, estimated at compensation ₹35,000 crore in FY26, are also expected to provide support.
Defense, capex to be prioritized
In terms of expenditure priorities, defense and capital spending are likely to remain in focus. BofA sees FY27 capital expenditure rising to ₹12.5 lakh crore, or 3.2% of GDP, with strategic sectors such as defence, railways and shipbuilding continuing 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, with implementation likely to begin in FY28.
Divestment Target
Divestment is expected to play a larger role in bridging funding gaps. While FY26 disinvestment receipts have lagged, BofA expects the FY27 divestment target to be doubled to ₹80,000 crore, reflecting increased reliance on non-tax and non-debt capital receipts, including the proposed IDBI Bank stake sale.
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