EY India pitches higher defence, tech capex in FY27 Budget; sees fiscal deficit at 4% of GDP

EY India has pitched for a further hike in capital expenditure in defence and advanced technology sectors in the Union Budget for 2026-27, while targeting a fiscal deficit of about 4% of GDP as the government balances growth imperatives with fiscal consolidation amid global headwinds.

In its Economy Watch report for January 2026, EY India said that the scope for additional tax reforms in personal income tax and GST may now be limited.

The report noted that despite the relatively low nominal GDP growth and the impact of GST 2.0, it may still be possible for the Centre to meet the FY26 fiscal deficit target of 4.4% of GDP.

“Assuming that the 4.4% fiscal deficit to GDP target is met in FY26, in our assessment, the FY27 target may be 40 basis points lower at 4% of GDP,” said D.K. Srivastava, Chief Policy Advisor, EY India.

Highlighting structural shifts in government finances over the past decade, EY India pointed out that the share of capital expenditure in total expenditure has nearly doubled, while the share of revenue expenditure has declined sharply, led by lower subsidies.

EY India said fiscal policy should continue to support medium-term growth objectives by increasing the share of capital expenditure further but reorienting it towards defence and advanced technology sectors such as artificial intelligence, generative AI, space, robotics and advanced infrastructure.

"The share of capital expenditure in total government expenditure may be increased further but changing its composition in favour of advanced technology sectors such as AI, GenAI, space, robotics and advanced infrastructure as also defense capital expenditure is desirable," the report said.

EY estimates real GDP growth for 2026-27 at 6.5% and nominal GDP growth at about 9.5%.

The capital expenditure growth in FY27 may be kept at least equal to nominal GDP growth, EY said.

The report also cautioned that lower nominal GDP growth could pose challenges to the government’s strategy of reducing the debt-to-GDP ratio.

“Calculations show an increase in the GoI’s debt to GDP ratio from 56.0% in FY25 to 56.1% in FY26 even if the fiscal deficit target of 4.4% is achieved,” Srivastava said.

However, a sustained reduction in the fiscal deficit towards 3% of GDP by FY30, EY India said, would open up additional investment space for the private sector and support long-term growth.