MC EXCLUSIVE Budget may peg fiscal deficit target for FY27 modestly lower than 4.4% of GDP

This is the first time in three years since September 2022 that India Inc’s cash reserves have seen a dip.

The Central government may opt for a slower pace of fiscal consolidation in the next financial year, as it feels that there is a need to support economic growth amidst external headwinds, two senior government officials told Moneycontrol.

According to the officials, the upcoming Union Budget may peg fiscal deficit for FY27 at 4.1-4.2 percent, as a percentage of GDP, which would be 20-30 basis points (bps) lower than the current financial year’s target of 4.4 percent.

"Unless, tariffs imposed by the United States are reduced to 25 percent or lower, growth in FY27 is unlikely to cross 6 percent. But, we are hopeful, a deal would be struck in the coming weeks," one official said.

In FY26, the RBI has projected real GDP to grow by 6.8 percent, 30 bps higher than the FY25 figure of 6.5 percent.

“Need to support growth”

"There are many factors pulling down economy…the government has to support growth going forward too, as it has been doing in the past three-to-four years," the person added.

The official didn’t reveal the capex number that the new Budget would peg for FY27, but said, it will not be lower than the current levels.

For FY26, the Centre’s capex-to-GDP ratio has been pegged at 3.1 percent, which is similar to the level attained in FY25. In FY24, the capex-to-GDP ratio was 3.2 percent.

Last week, in a pre-Budget meeting, economists told Finance Minister Nirmala Sitharaman to keep "pushing the pedal" on capex in FY27, even if it results in slower fiscal consolidation.

On July 26, Sitharaman had said that capex by central government is a “primary driver of sustained economic growth”, and that it will continue to be a prioritised going forward as well.

"There is a clear inclination towards supporting growth…as seen by income tax cuts, and GST rate reductions. So, the pace of fiscal deficit compression will come down, as against the pace seen in recent years," said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership.

To be sure, the fiscal deficit in FY25 stood at 4.8 percent of GDP, which was 80 bps lower than 5.6 percent of GDP in FY24. In FY23, the fiscal deficit stood at 6.4 percent; in FY22 at 6.7 percent; and in FY21 at 9.2 percent.

"It’s very likely that next year fiscal deficit figure will not be materially lower. If they wish to consolidate more, they will have to cut down capex…that’s unlikely," added Upadhyay.

Debt-to-GDP ratio

Further, a fiscal deficit aim of 4.1-4.2 percent in FY27 will also keep the central government on track to achieve its near-term target of attaining a debt-to-GDP ratio of 50% by FY31, the official added.

In FY25, central government’s debt-to-GDP ratio was 57.1 percent, which is likely to fall to 56.1 percent in FY26.

"The Centre has been consolidating fiscal deficit at a faster pace in the recent years, as it had set a target of reducing the figure to 4.5 percent by FY26. This target will be achieved," the second official said.

"Since, going forward, the aim is to reduce the debt-to-GDP ratio to 50 percent (by FY31), there is no need to opt for any major reduction in fiscal deficit. A modest lowering of the aim would be adequate," the person added.

The Central government has not yet decided its revenue and expenditure numbers. By December-end or early January, these figures would be finalized.

"In any normal year, going forward, where growth is 6.5 percent and CPI inflation are around 4 percent, you don’t need to consolidate your fiscal deficit very much to achieve 50 percent debt-to-GDP target by FY31," said Dhiraj Nim, economist, ANZ Research. Nim expects GDP growth to be above 6 percent in FY27, provided US tariffs shrinks to 25 percent or below.