Budget likely to target FY27 fiscal deficit at 4.2%, focus on boosting consumption and industrial output

Union Budget 2026 Expectations

• Expect government to set FY27 fiscal deficit target at 4.2%
• Expect FY27 budget to focus on boosting consumption and industrial output
• Don't expect significant changes in personal taxes
• Expect some initiatives for labour-intensive tariff-hit sectors

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Building on its Amrit Kaal vision, the government has focused on improving both the physical and digital infrastructure by allocating aggressively to capital expenditures in every budget over the last decade. We have viewed this as Phase-I of the Amrit Kaal vision of transforming India into a developed economy.

While Phase-I is underway, the focus has shifted to Phase-II, which involves growing economic output through widespread industrialization and increasing exports of manufactured goods and services. Supporting entrepreneurship, building an innovation ecosystem, focusing on sunrise sectors, and up-skilling the workforce have been some of the elements that are in focus under Phase-II.

We expect the FY27 budget to continue its focus on two key aspects from the last budget – supporting consumption and increasing industrial output. While we do not expect significant changes in personal taxes, there could be some relief in terms of a higher basic exemption limit or minor changes in the tax slab. Support for rural consumption in terms of employment guarantee schemes and food/fertilizer subsidies is likely to be sustained.

Performance-linked incentive (PLI) schemes are expected to be continued and expanded to support electronics, including semiconductors, mobiles, display units, and the manufacturing of clean-tech goods such as EVs, battery storage systems, renewables (solar panels, wind turbines), and green hydrogen electrolysers.

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We also expect more details on the National Manufacturing Mission, which was conceptualized in the last budget. To support deep tech and sunrise sectors, a research, development, and innovation (RDI) fund, launched in the month of November last year with a target corpus of Rs 1 lakh crore, may see some additional allocation beyond the Rs 20,000 crore allocated in the last budget.

We also expect some initiatives for labour-intensive tariff-hit sectors and industries including textiles, leather, toy manufacturing, among others, as well as for critical rare-earth minerals, which have become strong levers in the current geo-political trade-offs.

Capital expenditure to boost infrastructure and defence has remained the pivotal theme for the government, where we saw the total capex grow four-fold from Rs 3.8 lakh crore to Rs 15.5 lakh crore over the last 10 years.

The key focus has remained on roads, railways, and defence, which have attracted more than two-thirds of the total capital expenditure over the last five years. While we may not see any further increase in these allocations, we expect the government to continue to allocate more than Rs 7 lakh crore under these three heads. We expect significant growth in allocations for sectors such as power, renewables, and housing & urban affairs.

We expect the revenue expenditures to remain disciplined, in line with the conservative approach shown over the last many years. Revenue expenditure, excluding interest payments, saw a reduction last year, and over the last five years (FY21–FY26 BE), it was up only at a 0.6% CAGR, much lower than the growth in tax/non-tax receipts of a 15.9% CAGR and the capital expenditure growth of an 18.7% CAGR seen over the same period.

With all the fiscal impetus that the government is creating for the economy, it is still likely to meet, or do better on, the fiscal deficit target of 4.4% of GDP, and for FY27, we expect the government to set a fiscal deficit target of 4.2%.