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Below the Quote on Union Budget by Mr. Nikhil Khandelwal, Managing Director, Systematix Group

Union Budget FY27: Structural Intent Strong, Near-Term Growth Support Limited

The Union Budget FY27, despite an optimistic Economic Survey backdrop, delivers fiscal restraint rather than growth stimulus, reinforcing a “subpar equilibrium” for the economy. While the government signals a shift toward employment-intensive and inclusive growth, the fiscal math reveals persistent drag on near-term growth amid weakening tax buoyancy and tighter spending.

Macro & Fiscal Stance

* Fiscal consolidation continues, but at a slower pace. The fiscal deficit is budgeted at 4.3% of GDP in FY27 (vs 4.4% in FY26), offering limited macro support.

* Total expenditure growth (7.7%) lags nominal GDP growth (~10%), implying continued fiscal drag.

* Revenue expenditure grows modestly at 6.6%, while capex rises 11.5%, keeping capex-to-GDP flat at 3.1%.

* Interest payments surge to INR 14 tn (+10.2% YoY), consuming 40% of revenue receipts, the highest outside COVID years, crowding out productive spending.

* Market borrowings rise sharply to INR 19.7 tn, increasing pressure on bond yields.

Revenue & Tax Dynamics

* Gross tax revenue growth slows to 8%, below nominal GDP growth, reflecting declining tax buoyancy (elasticity falls to ~0.8x).

* Indirect taxes weaken, with GST collections projected to decline by 3% YoY, a key concern given slowing consumption.

* Direct taxes are budgeted to grow ~11%, but repeated shortfalls in recent years raise risks of further revenue slippage.

* Continued reliance on RBI dividends and cash drawdowns signals underlying fiscal stress.

Policy Direction: Positive Intent, Limited Impact

The budget outlines constructive long-term themes:

* Focus on services-led and employment-intensive growth, MSMEs, healthcare, tourism, and manufacturing.

* Emphasis on infrastructure efficiency (rail corridors, logistics, waterways), self-reliance (rare earth corridors, chemical parks), and balanced regional growth (tier-2/3 cities, temple towns).
However, these initiatives are structural and long-gestation, offering little immediate demand impulse.

Markets & Sectoral Implications

* Equities: Market reaction reflects disappointment. Measures like the STT hike and lack of growth thrust weighed on sentiment. Buyback tax relief helps cash-rich firms (IT, MNC consumer), but higher NRI investment limits may not meaningfully offset FII outflows.

* Bonds: Higher borrowings, revenue risks, and slower fiscal improvement keep an upward bias on yields.

• Sectoral highlights:
• Positive: Capital goods (railways, power, defence modernization), infrastructure, autos (PLI + infra push), agrochemicals (high-value crops, AI tools), IT (tax clarity).
• Mixed/Negative: Banks (policy uncertainty), consumer sectors (weak consumption signals), fertilizers (duty impact).

Bottom Line

Budget FY27 reflects a clear policy pivot toward inclusive, employment-focused growth, but falls short on near-term stimulus. By prioritizing consolidation amid slowing private demand and external headwinds, it risks entrenching subdued growth, challenging the “Goldilocks” narrative and underscoring the need for policy recalibration to revive momentum.

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