Fiscal deficit: SBI sees 4.2% in Budget 2026

Why the fiscal deficit target is in focus

India’s fiscal deficit math is back in the spotlight ahead of the Union Budget 2026-27, with markets watching whether the consolidation path stays on track. The government has pegged the fiscal deficit for FY26 at ₹1,558,000 crore, or 4.4% of GDP, a level economists say is achievable even with some pressure on tax collections. SBI Research expects the next step in the glide path to take the FY27 fiscal deficit to around 4.2% of GDP. The forecast comes as global uncertainty remains elevated and commodity prices are showing signs of firming up. Analysts also flagged that a revision to India’s GDP series could change the fiscal arithmetic, even if headline policy intent remains unchanged.

SBI Research forecast: FY27 deficit at around 4.2%

SBI Research expects the fiscal deficit for FY27 to be budgeted at about 4.2% of GDP, extending the government’s consolidation trajectory. The report sees nominal GDP growth for budget calculations at around 10.5% to 11% in FY27. It cautioned that higher international commodity prices could percolate into wholesale inflation, affecting the macro assumptions behind Budget numbers. SBI also highlighted a key uncertainty around crude oil, warning that prices could break out of what it described as an “artificially managed supply glut.” Against this backdrop, the report’s base case still keeps the deficit projection anchored near 4.2% of GDP.

FY26: meeting the 4.4% target despite slower nominal growth

For FY26, SBI Research expects the government to meet the fiscal deficit target of 4.4% of GDP even if nominal GDP growth is slower than earlier assumptions. The report attributes this to spending discipline and an improvement in the quality of expenditure. Separate commentary from market participants also pointed to higher non-tax revenues helping offset a likely shortfall in tax revenues. Soumya Kanti Ghosh, SBI’s group chief economic adviser, said that even if tax revenues undershoot, higher non-tax revenues and lower overall expenditure could keep the deficit largely unchanged. He also noted that with a revised GDP base, the deficit ratio could still remain at 4.4%.

Where the stress is emerging in FY26 numbers

Available in-year data suggests the fiscal position is tight but manageable. Between April and November, the fiscal deficit stood at ₹976,000 crore, or 62.3% of the full-year target. Over the same period, net receipts were reported at ₹1,390,000 crore, while non-tax revenues at ₹520,000 crore were described as a cushion. Economists cited by ET Online also flagged that tax collections were tracking behind the targeted growth rate, with one estimate putting the shortfall versus the budgeted target at around ₹50,000 crore. These numbers reinforce why expenditure planning and the mix of revenues matter as the government prepares the FY27 Budget.

Nominal GDP, inflation assumptions, and the GDP-series caveat

SBI Research’s nominal GDP growth assumption of 10.5% to 11% is central to its Budget arithmetic for FY27. The report underlined that global commodity prices could lift wholesale price inflation, which can change nominal growth outcomes. It also said the fiscal calculations could shift once India adopts a new GDP series. That caveat matters because many fiscal ratios are expressed as a share of GDP, and a change in the denominator can alter deficit ratios without an immediate change in cash flows. SBI also warned that slower nominal growth may hurt tax revenues in FY27, implying the need for better expenditure planning.

GST reform: limited hit to the deficit, SBI says

SBI’s assessment also covered potential GST changes and their fiscal impact. Ghosh said the government is likely to meet its fiscal deficit target even if an overhaul of the goods and services tax regime leads to revenue loss. SBI estimated the average revenue loss from GST reform could be around ₹85,000 crore annually. For FY26, the revenue loss could be ₹45,000 crore, with half potentially offset by the GST compensation cess fund balance of about ₹45,000 crore. SBI said around ₹22,500 crore could be used from the fund to offset potential revenue loss, leaving another ₹22,500 crore to be absorbed elsewhere, which it said could “at best add 5 bps” to the Centre’s fiscal deficit.

Borrowing pressures: Centre and states in FY27

On government borrowing, SBI Research expects net central borrowing of ₹1,170,000 crore in FY27, alongside repayments of ₹487,000 crore. It also expects state gross borrowings to rise to ₹1,260,000 crore, with repayments of ₹420,000 crore. Separately, an economist estimate cited in the broader debate suggested the government could keep gross borrowing around ₹1,450,000 crore for FY27. Borrowing costs were also flagged, with SBI commentary pointing to a cost of borrowing for the government of around 6.8% to 7.0% in FY27, with risks described as evenly balanced.

Five-year market borrowing path and capex expectations

SBI Research estimated gross market borrowings over the next five years could total ₹9,380,000 crore to ₹9,520,000 crore, averaging ₹1,800,000 crore to ₹1,900,000 crore annually. On spending priorities, SBI Research said India may remain a global bright spot as government capital expenditure could cross ₹1,200,000 crore in FY27, implying about 10% annual growth. The combination of a lower deficit ratio with sustained capital spending is one reason fiscal numbers are closely tracked by bond investors and equity markets alike.

Key numbers at a glance

Market impact: what investors will track into Budget 2026

Fiscal deficit guidance influences government borrowing supply, which in turn shapes bond market expectations around yields and demand. SBI’s projections on net central borrowing and the cost of borrowing (6.8% to 7.0%) provide a reference point for how the interest bill may evolve if macro conditions stay stable. Equity investors tend to track whether capex remains protected while revenue spending is rationalised, especially when tax collections lag. The report’s focus on non-tax revenues, including RBI dividend support mentioned in broader commentary, adds to the view that the deficit could be contained without abrupt policy moves. The crude oil risk highlighted by SBI matters because imported energy prices can affect inflation, subsidy dynamics, and tax collections.

Analysis: why the 4.2% FY27 marker matters

A move from 4.4% in FY26 to around 4.2% in FY27 would signal continuity in consolidation rather than an aggressive reset, aligning with economist expectations clustered around 4.0% to 4.2%. The most immediate sensitivity remains nominal GDP growth: if nominal growth is slower, tax buoyancy can soften, increasing the need for expenditure prioritisation. Policy choices like GST rationalisation and possible reductions in marginal personal income tax rates were cited as potential cushions for the tax base, but they also highlight trade-offs between growth support and near-term revenues. The GDP-series change flagged by SBI is another variable because it can affect reported ratios even when cash deficit paths remain similar.

Conclusion

SBI Research expects Budget 2026-27 to target a fiscal deficit of around 4.2% of GDP, supported by expenditure discipline, improving expenditure quality, and non-tax revenue buffers. The report also highlights global commodity prices, crude oil uncertainty, and a possible GDP-series shift as key swing factors for fiscal arithmetic. With FY26 still targeted at 4.4% of GDP and borrowing plans for FY27 coming into view, markets are likely to focus on the final Budget assumptions on nominal GDP, borrowing, and the capex envelope when the Budget is presented next month.