- Positive strides in India’s fiscal health were attested by a rating upgrade last year.
- The debt-to-GDP ratio will be the primary anchor for the FY27 Budget, aligned to deficit goals.
- Gross borrowing is poised to rise to a fresh high, factoring in redemptions and potential switches.
- We expect Budget measures to align with the economy’s strategic ambitions, ..
- … including on manufacturing and social welfare.
Related insights
- G10 Rates: Greenland adds to long-end pressures20 Jan 2026
- Eurozone markets: Greenland developments throw a fresh spanner 20 Jan 2026
- USD’s three-week rally stalls 20 Jan 2026
Click here to read the full report
India’s fiscal health has strengthened post-pandemic, with the central government’s deficit halving in this timeframe. A testament to this confidence, S&P upgraded India’s outlook and sovereign rating after nearly 18 years in 2025. We expect this trend to continue, albeit the pace of aggressive consolidation is likely to moderate.
FY26 run rate necessitates expenditure rationalisation
We don’t expect a compromise in meeting the FY26 fiscal deficit target, with a shortfall in tax collections likely to be compensated by a recalibration in spending outlays.
Firstly, the impact of the prevailing sub-9% nominal GDP vs. the budgeted 10.1% for FY26 on the fiscal math will be minimal. The First advance GDP growth estimate at 7.4% was near street expectations, capturing data up to Nov25-early Dec25, lending upside bias to the second reading/actual release, as in the past. Secondly, the Apr-Nov25 (8MFY26) deficit was wider than the corresponding period last year. The 8MFY26 deficit reached 62.3% of the annual target, compared to 52.5% at the same time in FY25. Next, net tax receipts are on course to miss budgeted estimates due to the GST rate rationalisation measures, direct tax relief, and lower tax buoyancy on the back of weaker nominal growth (see chart). Fourth, expenditure compression will also be a crucial part of the balancing math.
FY27 targets to align debt with deficit levels
Key factors for the FY27 Budget will include:
Debt to GDP ratio will be the primary anchor, i.e., aiming to lower the Centre’s debt to 50% of GDP by FY31 from ~56.1% in FY26, aligned with the deficit targets. This compares with the previous practice of setting a specific deficit target.
For our base case, nominal GDP growth is assumed at 10% yoy, compared to a revised ~8.0-8.3% in FY26 (see table for details).
We don’t expect any surprise tax announcements in the Budget presentation.
Given the improvement in the nominal GDP, tax buoyancy is also set to improve.
Centre’s capex budget in FY27 to stay around 3.0-3.1% of GDP, up ~7-8% yoy from FY26, with an emphasis on identifying shovel-ready and greenfield projects.
We expect a small moderation in revenue expenditure, with the proportion likely to moderate from 10.8% of GDP (FY26 RE) to 10.7% of GDP in FY27 BE.
While outside the remit of the budget, state finances will be an important watch factor. On a related note, the country is heading into a busy period for state elections in 1H26, with Tamil Nadu, West Bengal, Puducherry, Kerala, and Assam heading to the polls in May-June 2026.
The size of borrowings will be an important consideration for the bond markets. Given our underlying math and deficit target, we expect FY27 net borrowings to rise to INR 12trn (vs ~INR 11.4trn in FY26), which amounts to ~73% of the deficit next year (see second chart).
Budget agenda – align with strategic objectives
Tracking the government’s move to expedite reforms and oil domestic engines in the past year, we expect the FY27 Union Budget to back strategic priorities and expand the role of ‘new economy’ sectors. Admittedly, affirmative action will continue outside the budget schedule as well.
First is to continue with higher capex outlays towards infrastructure into railways, roads and highway, defence and transfers to states (these make up ~80% of effective capex), just as private investments, on aggregate, remain uneven and face global uncertainty. Second, prioritise strategic sectors, including defence, semiconductors, electronics, renewable energy, artificial intelligence/ robotics, etc. Budget allocations towards the defence sector have targeted modernisation and the expansion of indigenous manufacturing capacity, with indications of a double-digit increase in the FY27 Budget. The aggregate share of manufacturing as % of GDP has yet to improve materially, even as certain segments have expanded their market share. In addition to stimulus, the strategy will also focus on improving competitiveness.
Next, ironing out governance issues will be prioritised via a focus on deregulation and decriminalisation to identify and eliminate redundant or outdated compliance obligations in key sectors, via a bottom-up approach. While the formation of the official Deregulation Commission announced in last year’s budget appears to still be waiting in the wings, other high-level committees have sought to address these issues, including involving states to address concurrent subjects like land and labour. We’ll await further details on the proposed commission, which would ideally have representation from all key stakeholders especially from the private sector and regulators. Lastly, ground-up support for the domestic priority sectors is bound to continue - four key priority groups, Gareeb (poor), Yuva (youth), Annadata (farmers) and Naari (women) – referred to as GYAN segments, are likely to be in the forefront of social assistance and development programs.
Click here to read the full report
Topic
Explore more
E & S FlashGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates & Digital Assets)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.
Related insights
- G10 Rates: Greenland adds to long-end pressures20 Jan 2026
- Eurozone markets: Greenland developments throw a fresh spanner 20 Jan 2026
- USD’s three-week rally stalls 20 Jan 2026
Related insights
- G10 Rates: Greenland adds to long-end pressures20 Jan 2026
- Eurozone markets: Greenland developments throw a fresh spanner 20 Jan 2026
- USD’s three-week rally stalls 20 Jan 2026
- Member of Central Deposit Insurance Corporation (CDIC)