Budget 2026: FY27 fiscal deficit likely to remain at 4.4%
What's the story
The upcoming Union Budget for 2026 is likely to maintain the fiscal deficit at 4.4% of GDP for FY27, according to a report by Nuvama. The prediction comes as the Indian economy shows signs of fragile momentum. Instead of fiscal expansion, the government is expected to focus on deregulation and disinvestments to stimulate growth in key sectors such as semiconductors and artificial intelligence (AI).
Fiscal strategy
Nuvama's forecast for FY27 fiscal policy
Nuvama's report highlights that the Indian economy is nearing a bottom, but its momentum remains fragile. The impact of tax cuts announced in 2025 has boosted consumption in some areas. However, the firm doesn't expect this to lead to a broader demand revival as spending cuts are likely to help meet the FY26 gross fiscal deficit target of 4.4% of GDP.
Policy support
Recommendation for fiscal support in FY27
The report emphasizes the need for policy support, saying, "For FY27, monetary easing done so far must be complemented with fiscal support to enhance its effectiveness." This suggests that while fiscal expansion is unlikely, the Finance Minister may not tighten the fiscal stance further in FY27. Instead of deeper consolidation, Nuvama expects the Budget could keep the deficit at 4.4% of GDP for FY27, same as what is expected for FY26.
Growth strategies
Government's potential strategies to boost growth
To drive growth despite limited fiscal space, the government may rely on large-scale disinvestments or encourage public sector undertakings (PSUs) to increase capital expenditure. This has been low for many years. The report also mentions non-fiscal measures such as deregulation, credit-guarantee schemes, and initiatives to improve ease of doing business could be considered. A credit guarantee scheme for microfinance institutions (MFIs) targeting low-income borrowers is also on the cards.
Market outlook
Market response and potential impact on capital gains taxation
Nuvama notes that while higher development spending and increased capex would be positive signals from a market perspective, they may not be enough to stop the earnings downgrade cycle. The report warns of mean reversion in margins and external headwinds as key risks. Given these factors, Nuvama maintains a defensive stance but acknowledges any changes to capital gains taxation could influence market sentiment in the near term.
Strategic shift
Shift in priorities from FY26 to FY27
Nuvama also notes a shift in priorities from FY26 to FY27. The focus was on boosting consumption through tax rationalization in the former, but could now be on encouraging investment through deregulation. Sectors such as semiconductors, AI and robotics, and exports are likely to continue receiving attention. Overall, Nuvama predicts that the FY27 Budget could be mildly supportive of growth with a modest recovery pace.