Challenge for Budget 2026 will be to find new levers of growth, says YES Bank

The challenge for the Union Budget 2026-27 will be to find a new lever of growth, given that room for growing capital expenditure further would be restricted, while private investment demand is yet to become broad-based, YES Bank said in its ECOLOGUE report.

The report notes that the Centre has already delivered a strong consumption-oriented fiscal push in FY26, including what it terms a “tax bazooka” through direct and indirect tax measures. As a result, similar large-scale consumption boosters are unlikely in the upcoming Budget. At the same time, after several years of aggressive public capex expansion, fiscal space to use government spending as the primary growth engine is becoming limited.

YES Bank estimates combined centre and state gross borrowings at around ₹30 lakh crore in FY27, a level that is expected to keep the yield curve steep. The 10-year government security (G-sec) yield is projected to trade in the range of 6.60–6.85% in the first half of FY27, YES Bank noted.

While FY26 is expected to close with real GDP growth of over 7%, early estimates for FY27 point to a moderation to below 7%. Public capital expenditure was expected to crowd in private investment, but this has not materialised in a broad-based manner, largely due to weak demand visibility amid global uncertainties, YES Bank said.

Despite these constraints, the broad reform strategy of the government is unlikely to change. The YES Bank report expects the FY27 Budget to continue focusing on the long-term goal of Viksit Bharat, with an emphasis on inclusive growth through rural development schemes and empowerment of wider sections of the population.

India’s economic momentum improved in Q2 FY26, with real GDP growth accelerating to 8.2% year-on-year from 5.6% earlier, driven by strong performance in the secondary and tertiary sectors. Industrial activity also remained firm, with the Index of Industrial Production (IIP) rising to 6.7% in November 2025. Inflation has stayed benign, with CPI at 1.33% in December 2025, well within the RBI’s tolerance band.

However, global headwinds persist. Continued rupee depreciation points to external vulnerabilities, while the absence of a US trade deal poses downside risks for export-oriented sectors.

Against this backdrop, the FY27 Budget will need to balance fiscal consolidation with the need to sustain investment in growth-critical areas. YES Bank expects the government to target a reduction of 1 percentage point in the public debt-to-GDP ratio, aligned with a fiscal deficit target of 4.2% of GDP.