What is projected govt spending plan and fiscal policy outlook for Budget 2026-27?

The Union Budget for 2026–27 is likely to target a fiscal deficit of about 4.2% of gross domestic product, as the government seeks to balance fiscal consolidation with growth support amid rising global uncertainty and volatile commodity prices, according to SBI Research.

The Budget will be presented against the backdrop of rising geopolitical fragmentation, volatile global financial markets and a renewed uptrend in global commodity prices, including precious and industrial metals, SBI Research said in its pre-budget assessment.

“It is important that we continue to be on path of fiscal prudence as global debt threaten to rip apart the existing order... Remarkably India’s recovery post pandemic is better than what it was post global financial crisis,” the report said.

SBI Research expects nominal GDP growth of around 10.5% to 11% in FY27, factoring in a possible spillover of higher global commodity prices into wholesale price inflation.

A slower nominal expansion, however, could weigh on tax revenues, increasing the need for careful expenditure management.

Based on these assumptions, the fiscal deficit is projected at around 4.2% of GDP in FY27. The final arithmetic could change once India adopts a new GDP series, the report said.

Borrowing pressures

The report estimates net central government borrowing at about ₹11.7 lakh crore in FY27, equivalent to roughly 70% of the fiscal deficit.

State governments’ gross borrowings are projected at about ₹12.6 lakh crore, with repayments of roughly ₹4.2 lakh crore.

“With such large borrowings, the Government and the RBI may also have to work together to bring meaningful reforms in the SDL (state development loan) market,” the report said.

Capex, revenues and taxes

Government capital expenditure is expected to exceed ₹12 lakh crore in FY27, a year-on-year growth of around 10%, SBI Research said.

Direct taxes are expected to remain the dominant contributor to total tax revenue, accounting for about 59% in FY26, the highest share in 15 years. The trend of personal income tax collections outpacing corporate tax collections since FY21 is likely to continue in FY27, it said.

“We expect stable growth in non-tax revenue as both the dividend received from RBI and from the PSBs will be in line with the FY25 numbers,” the report said.

“Non-Tax revenue in FY26 may be impacted because of the volatile markets even as the Government will strive to optimize Non-Tax revenue,” it added.

Debt consolidation path

The government plans to place its debt-to-GDP ratio on a declining trajectory, targeting around 50% of GDP by FY31, down from an estimated 57.1% in FY25, assuming no major external shocks.

Over the next five years,

The report estimates gross market borrowings over the next five years could total between ₹93.8 lakh crore and ₹95.2 lakh crore, averaging ₹18–19 lakh crore rupees annually.

“It is thus imperative that Government also looks at borrowings through alternative and enhancing sources like small savings,” it said.

The report also flagged the importance of closer fiscal coordination between the centre and states, as state governments account for a significant share of overall public debt. It urged states to adopt medium-term, scenario-based debt-to-GSDP targets rather than relying solely on annual deficit ceilings.

India a relative bright spot

Despite global headwinds, SBI Research said India remains “an ocean of certainty” compared with other emerging and advanced economies, noting that the country’s post-pandemic recovery has been stronger than after the 2008 global financial crisis.

The report also outlined tax and sector-specific suggestions for the budget, including measures to boost household financial savings, simplify goods and services tax rules, and reform insurance and pension systems to improve coverage and long-term financial security.