Economy: FY2027 Union Budget preview: On an even keel by Kotak Institutional Equities
FY2027 Union Budget preview: On an even keel
India’s current economic backdrop, shaped by geopolitical tensions and trade uncertainty, warrants a steady, growth-supportive stance in the FY2027 Union Budget. We project FY2027 GFD/GDP at 4.3%, reflecting (1) slowing in fiscal consolidation pace, (2) continued capex momentum, particularly in defense and loans to states, and (3) modest tax buoyancy with a large RBI surplus transfer. Borrowing is likely to be elevated, given large redemption exerting upward pressure across the yield curve.
Fiscal consolidation can ease under the center’s debt/GDP target
Center’s debt/GDP target of 50±1% by FY2031 implies a modest annual GFD/GDP reduction of 10-20 bps (see Exhibit 1). We project FY2027 GFD/GDP at 4.3% (see Exhibit 2), supported by (1) tax revenue growth of 9% (FY2026E: 4%), (2) expenditure growth of 6% (FY2026E: 5%) and (3) non-tax revenue growth of 4% (FY2026E: 19%). Following income tax relief and GST rate cuts in FY2026, and given the prevailing fiscal constraints, we see a limited scope for any large fiscal stimulus in the FY2027 budget.
Some buoyancy in receipts to support the fiscal
Our FY2027 gross tax revenue growth of 9% is driven by (1) 11% growth in corporate (FY2026E: 9%) and 12% growth in personal income taxes (3%), supported by 10-10.5% nominal GDP growth (8.9%), stronger corporate earnings and moderate wage gains; and (2) strong GST and excise collections, reflecting higher taxes on tobacco. We estimate the RBI’s surplus at Rs2.9 tn (FY2026: Rs2.7 tn) due to the continued strength in foreign and domestic receipts (see Exhibit 3). We assume a slight increase in devolution to states, modeling the probable 16th Finance Commission’s recommendations, with an upside of Rs800 bn (0.2% of GDP) to revenues if the devolution ratio is unchanged.
Limited room for populism; focus on capex to continue
With multiple fiscal measures announced in FY2026, chances of additional measures seem low in the FY2027 budget. Further, with committed expenditure remaining around 60% of revenue expenditure, room for outright populism is limited without straining the fiscal (see Exhibit 4). While many states have pivoted toward populism, center has remained measured in its approach (see Exhibit 5). We note that some room must be preserved for the implementation of the 8th Pay Commission, likely in FY2028 (see Exhibit 6). We pencil in revenue expenditure growth at 5% and capex growth at 9% (with a focus on defense spending (20% growth) and loans for states’ capex) (see Exhibits 7-8).
Slower pace of fiscal consolidation could weigh on bond market
If the equity market risks being disappointed by the absence of large-scale measures/spending, the bond market may likewise be uneasy about the likely increase in market borrowings. We estimate a higher-than-usual gross GSec borrowing of Rs16 tn (FY2026E: Rs14.8 tn), given large redemption and net GSec borrowing of Rs12 tn along with Rs1 tn in T bills; potentially adding pressure across the yield curve (see Exhibit 9).
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