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The economic environment entering FY27 is more layered and complex than in recent years. The 2026 Union Budget arrives at a point where the economy appears to be bottoming out, although the momentum remains uneven. The 2025 tax cuts have supported specific segments of consumption, and early indications of improving credit growth and sector-focused capital expenditure are visible. The central challenge for the upcoming budget is to broaden these initial signs into a more durable, economy-wide recovery.

At the same time, lower personal income taxes and subdued nominal GDP growth have weighed on the government’s tax revenues. If nominal growth stays near current levels, even a committed fiscal consolidation path towards a 3% fiscal deficit may not be enough to achieve the debt-to-GDP target within the stipulated timeframe. Strengthening India’s manufacturing capabilities has therefore become even more essential, especially as global supply chains continue to be reshaped by China’s rising trade influence, shifting geopolitics, and the need for strategic resilience. Meanwhile, rising welfare expenditure by state governments offsets the Centre’s consolidation efforts and expands overall bond supply. As a result, the 2026 Budget must remain mindful of borrowing costs and ensure that higher-quality central spending partly balances the rise in state0level welfare expenditure.

Global conditions have turned more unpredictable. Despite a positive surprise in global trade in 2025, India did not benefit meaningfully likely due to the absence of a trade agreement with the United States and insufficient depth in domestic manufacturing of technology-intensive components. Net FPI flows have remained negative for two consecutive years. Even with a current account deficit below 1% of GDP, external financing has been tight, adding depreciation pressure on the rupee.

In this environment, the 2026 Union Budget leaned towards reform-oriented measures and a sharper focus on quality of expenditure, accompanied by selective tax changes. Measures have been focussed on enhancing the long-term productive potential of the country as a means to counter the external vulnerabilities and boost growth.

The budget maintained a balance between supporting growth and preserving fiscal prudence amid rising global uncertainty. The Gross Fiscal Deficit (GFD) for FY27 is projected at 4.3% of GDP (compared with 4.4% in FY26). This reflects a slower pace of consolidation relative to past years (100 bps in FY24, 70 bps in FY25, and 40 bps in FY26) and is slightly below market expectations of a 20-bps reduction. Combined with the removal of compensation cess (0.2% of GDP for FY27), the fiscal stance turns broadly neutral ending the fiscal drag that has persisted for five years. The Finance Minister reiterated the commitment to reduce central government debt?to?GDP to around 50% (+/?1%) by FY31, from 56.1% in FY26.

In FY26, the government adhered to its fiscal deficit target of 4.4% of GDP. As per revised numbers, gross tax?to?GDP is estimated to have dipped slightly from 11.5% in FY25 to 11.4% in FY26RE. Notably, FY26 saw significant tax changes in income tax and GST, which were expected to reduce collections by about 0.5% of GDP. The limited slippage of just 10 bps points to continued improvement in tax buoyancy.

Taking a recap of FY26 numbers, the government has stuck to its stated fiscal deficit target of 4.4% of GDP. As per revised FY26 numbers, India’s gross tax to GDP is estimated to have dipped by 0.1% of GDP in FY26 (from 11.5% of GDP in FY25 to an estimated 11.4% in FY26RE). To recap, FY26 had seen significant tax rate changes in income tax and GST, which would have shaved off the total tax collection by 0.5% of GDP in FY26 (full year impact of income tax and half yearly impact of GST). To that extent, a mere 10bps of tax slippage hints towards continued improvement in tax buoyancy.

A gross tax shortfall of Rs. 1.9 trillion is being partly offset by stronger non?tax revenue (mainly dividends and economic receipts) and Rs. 1 trillion of expenditure rationalisation. Some government schemes, such as Jal Jeevan Mission, urban development and housing programmes, faced execution gaps, resulting in spending undershoots.

The government expects nominal GDP growth of 10% y?o?y in FY27, up from an estimated 8% in FY26. The fiscal numbers appear broadly credible. Gross tax revenue is projected to grow by 8% y?o?y (versus 7.4% in FY26RE). The softness largely reflects the discontinuation of GST cess, which previously contributed 0.5% of GDP. Although part of the cess revenue shifts to CGST and excise (including cigarette?related adjustments), gross tax?to?GDP is expected to moderate from 11.4% to 11.2% in FY27. Excluding the cess, gross tax revenue growth of 10.4% appears achievable.

Dividend receipts also look attainable. Total dividends are projected to rise modestly from Rs. 3.75 trillion in FY26 to Rs. 3.9 trillion in FY27, with potential upside from the RBI once again. However, disinvestment and asset?monetisation proceeds—budgeted to rise from Rs. 338 billion to Rs. 800 billion—remain dependent on execution. The telecom receipts estimate of Rs. 1.4 trillion in FY26 and Rs. 1.2 trillion in FY27 appears ambitious given limited spectrum renewals or capacity pressures.

Total expenditure is expected to grow 7.7%, slightly above the 6.7% pace in FY26 but still lower than nominal GDP growth for the sixth consecutive year. Capital expenditure is projected to rise 11.5%, while revenue expenditure grows 6.6%. Defence capex is set to expand by 17% (after 16% in FY26). Roads and railways will see capex increases of 8% and 11% respectively.

Adjusting for broader infrastructure?related areas—housing, metro, water, and extra?budgetary resources—true infrastructure spending is expected to grow 17% in FY27 to Rs. 13.6 trillion, compared with Rs. 11.6 trillion in FY26RE. Execution will be crucial, especially in water and housing, where targets have been missed for two consecutive years.

Gross G?sec supply for FY27 is set at Rs. 17.2 trillion, above market expectations of Rs. 16–16.5 trillion. Short?term paper issuance of Rs. 1.3 trillion aligns with expectations, especially since the market saw negligible net short?term issuance over the past two years. Although the absolute fiscal deficit of Rs. 17 trillion is largely in line with expectations, the G?sec outlook was negatively affected by a net payment requirement in other capital receipts (a net payment of Rs. 458 billion in FY27 vs. net receipts of Rs. 759 billion in FY26).

The broader tax structure remained steady at a macro level, following significant reforms in recent years across capital gains tax, income tax and the GST regime. However, customs duty changes saw meaningful adjustments.

The recent duty rationalisation reflects a clear push to reduce input costs in priority sectors. Lower or zero import duties on critical minerals such as lithium, cobalt, copper ores and natural graphite help secure essential raw materials for EVs, semiconductors and renewable energy. Electronics manufacturing benefits from reduced duties on mobiles, chargers, PCBAs and capital goods, enabling deeper domestic value addition. Reduced duties on life?saving cancer medicines, diagnostic equipment and solar components enhance affordability and support clean?energy expansion. Export?linked sectors such as seafood and leather/textiles also gain from lower raw?material costs. Overall, these measures should reduce structural costs, improve competitiveness and reinforce the shift towards manufacturing?led growth.

Subsidy utilisation under the PLI scheme has been gradually rising, with around Rs. 200 billion expected to be disbursed in FY26. Between FY22 and FY26, total disbursements amount to Rs. 421 billion, representing about 14% utilisation of the earmarked allocation. The PLI envelope itself has expanded from Rs. 2.3–2.6 trillion four years ago to roughly Rs. 3 trillion today. For FY27, the government expects stronger uptake in autos, semiconductors, electronics components and white goods. PLI utilisation in large?scale electronics and IT hardware is likely to moderate temporarily as Round 2 has only recently begun and may see higher disbursement from FY28 onward.

The proposed tax holiday for data?centre?linked foreign companies could significantly benefit the industry. Foreign firms providing services based on Indian data centres will receive a tax holiday until 2047, subject to conditions: they cannot own or operate the data centres themselves, must channel domestic sales through an Indian reseller, and must be formally notified by the government. No major country currently offers a comparable tax holiday, making India potentially attractive for hyperscalers such as Amazon, Google and Microsoft. This could spur large?scale data?centre construction and expand demand for power, transmission, cooling systems, substations and optical fibre. However, key questions remain, including whether hyperscalers will be comfortable with not owning or operating their facilities, and whether other global hubs in the US, Germany or the UK will counter with similar incentives.

The July 2024 Budget had altered the taxation of buybacks (effective October 2024), making them less attractive. The current budget reverses that change, restoring buybacks as a preferred mode of capital return.

Beyond the fiscal arithmetic, the budget aims to support long?term growth and employment through increased infrastructure spending, tax incentives for data centres, expanded public capex and support for MSMEs through growth capital. From an equity?market perspective, although the STT hike is sentimentally negative, the overall budget remains broadly neutral across sectors. Defence companies stand to benefit from higher defence capex allocations.

The elevated gross and net borrowing numbers and the absence of specific measures to enhance bond demand are likely to put upward pressure on market yields. The Rs. 17.2 trillion G?sec supply exceeds expectations of Rs. 16–16.5 trillion. Therefore, although the broader fiscal?consolidation path and the medium?term reduction in debt?to?GDP are positive, near?term bond?market dynamics will continue to depend on RBI open?market operations. This remains a challenge and may keep yields higher than what macro fundamentals alone would justify.