India's FY27 Outlook: Budget 2026 Targets 10% Nominal GDP Growth

Introduction: Setting the Stage for Budget 2026

As Finance Minister Nirmala Sitharaman prepares to present her ninth consecutive Union Budget on February 1, 2026, all eyes are on the government's economic projections for the upcoming fiscal year. The central expectation is a projection of 10% to 10.5% nominal Gross Domestic Product (GDP) growth for FY27. This forecast comes after a year of strong real growth but subdued nominal expansion, setting a crucial tone for India's fiscal strategy, which continues to prioritize capital expenditure and consolidation.

A Look Back at FY26: Strong Growth, Muted Inflation

The Indian economy demonstrated remarkable resilience in FY26, with the first advance estimates from the National Statistical Office (NSO) pegging real GDP growth at a robust 7.4%. This performance, which marked a significant rebound from the 6.5% growth in the previous fiscal, was driven by strong domestic demand. Private consumption grew by 7%, while gross fixed capital formation, an indicator of investment, expanded by 7.8%. The manufacturing and services sectors were key contributors, growing at 7.0% and 9.1%, respectively.

However, the year was also characterized by unusually low inflation. Consumer Price Index (CPI) inflation averaged just 1.7% between April and December 2025. This sharp decline in prices narrowed the gap between real and nominal growth. Consequently, nominal GDP growth for FY26 was revised down to approximately 8%, well below the initial budget assumption of 10.1%. This lower nominal base has significant implications for the government's fiscal calculations, as budget aggregates like tax revenue and deficit targets are linked to nominal GDP.

Key Expectations from the Union Budget for FY27

The upcoming budget is expected to lay out a roadmap that balances growth imperatives with fiscal prudence. The projections for FY27 are built on an anticipated recovery in inflation and continued economic momentum.

Nominal GDP Growth Forecast

Economists and analysts widely expect the government to assume a nominal GDP growth rate of 10% to 10.5% for FY27. This figure is based on the Economic Survey's projection of 6.8% to 7.2% real GDP growth and an expected normalization of inflation towards the Reserve Bank of India's target of around 4%. A higher nominal growth figure provides the government with more fiscal space to manage its expenditure and borrowing programs.

Path of Fiscal Consolidation

The government is expected to continue its journey of fiscal consolidation. After targeting a fiscal deficit of 4.4% of GDP in FY26, the budget for FY27 is likely to aim for a further reduction to around 4.0%. This steady, incremental approach aims to bring the deficit down towards the 3% target outlined in the Fiscal Responsibility and Budget Management (FRBM) Act over the medium term.

Sustained Push on Capital Expenditure

Public capital expenditure (capex) has been the primary engine of India's growth in recent years. This trend is set to continue. The capex outlay for FY26 stood at ₹11.2 lakh crore, and the FY27 budget is expected to increase this by another 10-15%, potentially pushing spending beyond ₹12 lakh crore. This sustained investment in infrastructure is critical for improving logistics, enhancing competitiveness, and crowding in private investment.

India's Economic Indicators: A Snapshot

To provide a clear picture of the economic landscape, the following table summarizes key metrics from FY26 and the projections for FY27.

Managing Debt and Structural Reforms

A significant challenge for policymakers is India's high government debt, which stands at approximately 85% of GDP. The budget will be closely watched for a clear roadmap to reduce this ratio towards the 60% benchmark. The government's borrowing program for FY27 will be a key indicator of its fiscal discipline and will influence bond yields.

Beyond the numbers, the budget is being presented against a backdrop of significant structural reforms. The new Direct Tax Code is set to become effective from April 1, 2026, aiming to simplify tax laws. Additionally, the GDP series is transitioning to a new base year of 2022-23, which may alter historical growth data and future projections.

Analysis: A Shift Towards Investment-Led Growth

The overarching narrative for the Indian economy is a structural shift away from being primarily consumption-driven towards a model led by formal enterprises and capital investment. The government's consistent focus on capex, combined with reforms in taxation and ease of doing business, is designed to facilitate this transition. While global economic conditions remain uncertain, particularly with trade policy shifts in the US, India's growth story is increasingly powered by strong domestic drivers.

Achieving the projected growth will depend on the efficient execution of infrastructure projects, a revival in private investment, and stable macroeconomic conditions. The Reserve Bank of India's monetary policy will also play a crucial role, with decisions likely to remain anchored to its inflation targets.

Conclusion

The Union Budget for FY27 is poised to be a statement of confidence in India's economic trajectory. By projecting a return to double-digit nominal GDP growth, the government is signaling its intent to pursue expansion while adhering to a path of fiscal responsibility. The key focus will remain on leveraging public investment to build a foundation for sustainable, long-term growth, aligning with the broader vision of a developed India by 2047. The final details, to be unveiled on February 1, will provide a comprehensive blueprint for the year ahead.