Pre-Budget Reality Check: Can India Stick To The 4.4% Fiscal Deficit Target?

As the Union Budget 2026 approaches, fiscal management rather than fiscal fireworks is likely to define the government's approach. Recent trends in the Centre's finances underscore a delicate balancing act between sustaining growth through public investment and adhering to a credible consolidation path.

Against this backdrop, Budget 2026 will be closely watched for signals on the next phase of fiscal consolidation. With limited room for aggressive tightening, the upcoming budget is expected to prioritise realism-conservative revenue assumptions, sustained emphasis on growth-enabling capex, and calibrated borrowing-while laying the groundwork for medium-term fiscal sustainability.

During Apr-Nov FY26, the centre's gross fiscal deficit as a percentage of the budget estimate target was higher than the same time last year, owing to a sharp rise in capital expenditure as well as lower net tax revenue. The capital expenditure was largely driven by roads and railways, given continued focus on physical infrastructure, while revenue spending was mildly lower, with a pickup in interest payments offsetting lower subsidies.

Tax collections so far are lower on both direct (income tax) and indirect taxes (GST), while corporation and union excise collections have grown. Slower tax collections can also be attributed to moderation in nominal GDP growth this year. The non-tax revenue (dividends from PSU, financial institutions and the RBI) was upbeat vs levels last year.

"This should help the GOI meet the fiscal deficit target of 4.4% this year, along with a potentially sharp drop in spending as well (also with inadequate GST compensation cess in the past few months, forcing the GOI to lower spending rather than opting for increased market borrowing)," said Naval Kagalwala, COO & Head of Products, Shriram Wealth Ltd.

Starting FY27, the GOI will follow a new glide path of debt to GDP as a major fiscal anchor in line with global practice, and one which captures fiscal decisions of the past as well as future. The GOI aims to set fiscal deficit such that debt % GDP is on a declining path to attain a level of 50+/-1% by FY31.

"The pace of fiscal consolidation in FY27 is likely to be limited, with a gross central fiscal deficit likely to be set at around 4.2-4.3% of the GDP. The assumptions around tax collections will likely be more conservative in the upcoming year, with nominal GDP growth likely to be set around 10% (in line with a pickup in inflation, along with a lagged impact of monetary easing aiding growth conditions)," commented Naval Kagalwala.

Focus on capex is expected to be retained in the forthcoming financial year as well, given limited headroom later in FY28 at the time of implementation of 8th pay revision (higher revenue spends then will weigh upon continued emphasis on capital expenditure).

"We do not anticipate any major changes in personal income tax this year. The gross market borrowing will likely remain elevated in FY27 owing to heavy G-sec redemptions - this fatigue appears to have been reflected in the bond markets in the past few sessions, with the 10-year bond yield moving up despite various liquidity measures, including OMOs and USD/INR buy-sell swap, being announced by RBI. However, the gross borrowing target can be tweaked through increased bond switch announcements - wherein bonds maturing in say FY27 are switched with longer tenor bonds," stated Naval Kagalwala.

From an Equity market perspective, participants will be watching for measures to support growth - whether those would be directed towards higher capex (which has long term multiplier effects) or measures to boost consumption or a combination of both. Also, support for export sectors affected by US tariffs, measures to boost manufacturing and employment, such as outlays for PLI schemes, VB-G RAM G (which has replaced MNREGA), etc,. would be tracked.

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