Budget 2026: Fiscal Deficit Set at 4.3% Amid Capex Push

Introduction: A Strategy of Growth-Led Consolidation

Finance Minister Nirmala Sitharaman presented the Union Budget for the financial year 2026-27 on February 1, 2026, outlining a fiscal strategy that bets on sustained economic growth to manage public finances. In her ninth consecutive budget, the minister charted a course that prioritizes robust capital expenditure while adhering to a gradual path of fiscal consolidation. The budget avoids aggressive spending cuts, instead relying on an anticipated strong nominal GDP growth to keep deficit and debt ratios on a downward trajectory amid global economic uncertainties.

The Macroeconomic Backdrop

The budget is set against a backdrop of solid real GDP growth, projected between 6.5% and 7% for FY27. However, the previous fiscal year (FY26) saw lower-than-expected nominal GDP growth of around 8%, primarily due to benign inflation, which averaged just 1.7% between April and December 2025. This subdued nominal growth put pressure on tax collections and fiscal aggregates. For FY27, the budget's fiscal arithmetic is critically dependent on a rebound in nominal GDP growth to the 10.5-11% range, which incorporates assumptions of both healthy real growth and a normalization of inflation towards the RBI's 4% target.

Expenditure Driven by Capital Outlay

Total government expenditure for FY27 is projected at ₹53.47 lakh crore, a 7.7% increase over the revised estimates for FY26. The primary engine of this spending increase is capital expenditure (capex), which has been a consistent focus of the government's growth strategy. The capital outlay is set to rise by 11.5% to ₹12.22 lakh crore from ₹10.96 lakh crore in the previous year. This sustained push in infrastructure spending is intended to boost growth, improve logistics, and attract private investment, which has remained cautious. In contrast, the growth in revenue expenditure remains modest, signaling a clear policy choice to favor asset creation over consumption-led stimulus.

Revenue Projections and Tax Buoyancy

On the receipts side, the government estimates total revenue receipts at ₹35.33 lakh crore for FY27. Net tax receipts for the Centre are budgeted at ₹28.67 lakh crore, a 7.2% increase over the previous year. The budget continues to rely heavily on direct taxes, with income tax collections projected to grow by 12.5% to ₹14.66 lakh crore. Goods and Services Tax (GST) collections are estimated at ₹10.19 lakh crore, showing moderate growth. Non-tax revenue is pegged at ₹6.66 lakh crore, slightly lower than the previous year, indicating less reliance on one-off dividends from public sector enterprises and the RBI.

Key Budget Figures at a Glance

The following table summarizes the core fiscal metrics presented in the Union Budget 2026-27, comparing them with the revised estimates of the previous financial year.

The Fiscal Deficit and Borrowing Programme

The fiscal deficit for FY27 is targeted at 4.3% of GDP, or ₹16.96 lakh crore in absolute terms. While this represents a marginal improvement in the deficit-to-GDP ratio from 4.4% in FY26, the absolute deficit has increased. Consequently, the government's borrowing program remains elevated. Gross market borrowings are set to rise to ₹17.2 lakh crore. A significant portion of government revenue continues to be allocated to interest payments, which are estimated at ₹14.04 lakh crore, consuming over 40% of net tax receipts and limiting fiscal flexibility.

The Debt Management Roadmap

The budget continues the government's focus on gradually reducing its debt burden. The central government's debt-to-GDP ratio is projected to decline slightly to 55.6% in FY27 from 56.1% a year earlier. While the direction is positive, the pace of reduction is slow, reflecting the trade-off between supporting growth through high expenditure and achieving faster fiscal consolidation. The primary deficit, which excludes interest payments, is projected to fall to 0.7% of GDP, indicating a slight improvement in the underlying fiscal position.

Analysis: A Calculated Risk on Growth

The Union Budget 2026-27's strategy is a calculated wager on India's growth potential. The entire fiscal framework is anchored on the assumption of achieving double-digit nominal GDP growth. If this growth materializes, the government can manage its debt and deficit targets without resorting to austerity measures that could harm the economic recovery. However, if nominal growth falters due to weaker-than-expected real growth or continued low inflation, the fiscal math could come under significant strain, potentially forcing the government to either increase borrowing or cut spending later in the year. The elevated gross borrowing figure will be closely watched by the bond markets for its potential impact on yields.

Conclusion

In summary, the Union Budget for 2026-27 reinforces a consistent policy narrative: using public investment in infrastructure as the main driver of economic growth while pursuing a gradual and steady path of fiscal consolidation. The success of this strategy hinges almost entirely on the economy achieving the projected 10.5-11% nominal GDP growth. The budget signals confidence in India's economic resilience but also carries inherent risks tied to its optimistic growth assumptions. Execution of capital projects and the revival of private investment will be critical to realizing the growth required to validate the budget's fiscal arithmetic.