Sitharaman's Budget 2026-27: Fiscal discipline meets growth aspirations

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• Fiscal deficit target set at 4.3 percent of GDP for 2026-27
• Debt-to-GDP ratio aimed to fall to 50 percent by 2031
• Capital expenditure projected to rise to Rs 12.2 lakh crore in 2026-27

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Finance Minister Nirmala Sitharaman on February 1 presented a tightly defined fiscal plan, reinforcing the government's commitment to its medium-term goals under the new macro-fiscal policy framework announced last year.

The budget for 2026-27 reinforced the emphasis on the new approach with a target to lower the central government's debt-to-GDP ratio to 50 per cent by 2031.

She set a fiscal deficit target of 4.3 per cent of GDP for 2026-27. The revised estimates for fiscal deficit in 2025-26 stood at 4.4 per cent, same as the budgeted 4.4 per cent.

Importantly, the debt-to-GDP ratio for 2026-27 has been pegged at 55.6 per cent, lower than the revised 56.1 per cent of 2025-26. Maintaining a declining gradient of the debt-to-GDP ratio is essential to meet the stated goal of less than 50 per cent by 2030-31.

This would effectively imply that the central government’s debt-to-GDP ratio will have to decline by more than one percentage point every year on an average from 2026-27 onwards until 2030-31.

The plan marks a steadfast focus towards debt sustainability, with public debt as a ratio to GDP emerging as the principal policy anchor moving away from fiscal deficit as a single point reference for government borrowing coordinates.

The government’s fiscal glide path, however, is predicated upon robust nominal GDP expansion, at least upwards of 10 per cent, over the next three years and beyond. This would have to come about even in times of expansionary central budgets driven by increasing capital expenditure as infrastructure and asset creation will likely remain the budgetary nuclei to trigger economy-wide multipliers.

Nominal GDP growth for 2026-27 has been projected at 10 per cent, sharply higher than the revised 8 per cent nominal GDP growth in 2025-26.

Known Unknown: Pay Commission

The other known unknown in the medium-term fiscal glide path is that of the pay commission payouts to millions of central government employees and pensioners. The 8th pay commission, which was constituted last year, will likely finalise its report in 2026.

The revised salaries, with arrears effective from January 1, 2026, will have both a one-time and perpetual bearing on the government revenue expenditure. This will have to be factored in from 2027 onwards.

The revenue side of the central budget equation will have to rise commensurately to more than offset the swollen this to prevent forcing the government to borrow more to fund its swelling wage bill and any slip up on the debt-to-GDP goals.

The lower fiscal deficit—short hand for the amount of money the government plans to borrow to fund its expenses—comes despite pencilling in an increased annual expenditure, which is projected to rise by 7.7 per cent to Rs 53.4 lakh crore for 2026-27 from the revised estimates of Rs 49.6 akh crore in 2025-26.

The government's fiscal carefulness is underpinned by its focus on enhancing revenue collections, with projected tax revenues (net) of Rs 28.6 lakh crore, representing an 7.2 percent increase from the revised estimates of Rs 26.7 lakh crore for 2025-26.

The budget also outlines measures to bolster non-tax revenues, dividends from the Reserve Bank of India (RBI), banks and public sector companies, which are expected to generate Rs 3.16 lakh crore in 2026-27, a 3.7 per cent increase from the previous year.

Sitharaman's budget demonstrates a careful balancing act, juggling the need for fiscal discipline with the imperative of addressing socio-economic priorities. The government's commitment to fiscal responsibility is evident in its efforts to contain the primary deficit to 0.7 per cent of GDP, lower than the 0.8 per cent estimated for 2025-26.

The primary deficit - a key metric that lays bare the government's borrowing habits - reveals the extent to which India's debt is being devoured by interest payments. If the government stays on track to meet its targets by March 2027, a shrinking primary deficit will be a telling sign of improved fiscal health, a welcome development for fiscal purists who demand judiciousness in public finances.

The other key marker is that of revenue deficit, which has been pegged at 1.5 per cent of GDP for 2026-27, same as 2025-26. A persistently flat or downward trajectory of revenue deficit mirrors sound debt and expenditure management, implying that progressively a greater proportion of government loans are being used to fund asset creation, as opposed to borrowing money to fund current consumption.

Capex for growth

The finance minister has also pencilled a capital expenditure of Rs 12.2 lakh crore in 2026-27 which is 11.5 per cent greater than the revised Rs 10.9 lakh crore for 2025-26. Over the last three years, government capital expenditure has continued to rise, signalling the government’s continued commitment to do investment heavy lifting through highways, ports and other infrastructure projects that spin jobs and multiply income.

Revenue expenditure is set to grow to Rs 41.2 lakh crore in 2026-27, up 6.6 per cent from the revised estimates of Rs 38.6 lakh crore for 2025-26.

Revenue expenditure as a percentage of total expenditure is also set to marginally fall from 77.9 per cent 2025-26 to 77.1 per cent in 2026-27.

Revenue expenditure as a percentage of total expenditure has plummeted from 88 per cent in 2017-18 to 77.1 per cent in 2026-27, despite the government's focus on addressing the pressing needs of farmers, small industries, the rural economy, and job creation, with a greater emphasis on budgetary spending for these objectives.

RBI bonanza again

Finance minister Sitharaman is set to enjoy greater fiscal elbow room in 2025-26 thanks to another projected dividend payout by the Reserve Bank of India (RBI).

The budget has earmarked a projected RBI and banks’ dividend payout of Rs 3.16 lakh crore in 2026-27, on the back of Rs 3.04 lakh crore the government is projected to receive in 2025-26.

The RBI annual payout to the government is generated from its surplus income, earned through investments, valuation changes in its dollar holdings, and fees from printing currency. While the RBI retains a portion of this surplus to bolster its capital, the majority is transferred to the government.

Although the exact amount is usually okayed by the RBI’s central board in May, the government factors in a projected amount in the annual budget estimates.

Tax estimates need to hold

The finance minister has set ambitious revenue targets for 2026-27, buoyed by the RBI's mega dividend payout that has provided fiscal leeway. The government is projecting a total tax revenue of Rs 28.6 lakh crore, representing a significant increase of 7.2 per cent from the revised estimates of Rs 26.7 lakh crore for 2025-26. This optimism is driven by expectations of robust growth in various tax categories.

Corporate income tax collections, including cesses and surcharges, are projected at Rs 12.3 lakh crore, up 11 per cent from the revised estimates of Rs 11.09 lakh crore for 2025-26. Similarly, income tax collections, including cesses and surcharges, are set to rise to Rs 14.66 lakh crore in 2025-26, up 11.7 per cent from the revised estimates of Rs 13.12 lakh crore for 2025-26.

A higher individual income tax collection is anticipated, on the assumption of relatively better income and spending ability, which is expected to boost aggregate demand and corporate profitability.

However, moderation in the broader economy and sluggish household demand may test these assumptions. The government's GST revenue projections are bearish, with higher collections expected to reflect rising household spending. As GST is a destination-based tax, flattish consumer demand for goods and services should translate to higher GST revenue. GST revenues for 2026-27 have been projected at Rs 10.19 lakh crore, down 2.6 per cent from the revised estimates of Rs 10.46 lakh crore for 2025-26.