India’s FY27 Union Budget faces a familiar but increasingly complex challenge: sustaining economic momentum while tightening fiscal discipline. A notable shift this year is the government’s decision to anchor fiscal strategy to the public debt-to-GDP ratio, rather than the fiscal deficit alone. This change offers some flexibility after years of sharp consolidation, especially as nominal GDP growth is expected to rise to around 10–10.5% in FY27, from about 8% in FY26.
The Centre is expected to reduce public debt by one percentage point to around 55% of GDP in FY27, aligning with a fiscal deficit of roughly 4.2% of GDP. Stronger nominal growth and a likely bumper dividend from the Reserve Bank of India are expected to provide support. However, policymakers will need to retain fiscal headroom to accommodate the next Central Pay Commission award in FY28.
Limited room for traditional growth levers
With real GDP growth expected to slow to below 7% in FY27, the Budget’s biggest test will be identifying a new growth driver. The government has already delivered a consumption-focused push in FY26 through significant tax measures, leaving little scope for further stimulus on that front. At the same time, the space to meaningfully raise public capital expenditure has narrowed after several years of strong increases.
Private investment, which was expected to be crowded in by public capex, has yet to broaden, largely due to global uncertainties and uneven demand visibility.
Employment, exports and state-led investment
The Budget is expected to maintain its reform-oriented approach under the broader vision of Viksit Bharat, with a renewed focus on employment generation, rural development and inclusive growth. With trade negotiations with the US still unresolved, protecting export-oriented MSMEs, reskilling displaced workers and exploring new markets are likely to feature prominently.
The Centre may also push states to step up capital expenditure and improve efficiency by reducing cost and time overruns in projects.
Borrowings and bond market outlook
Combined Centre and state borrowings are estimated at nearly ₹30 trillion in FY27, keeping the yield curve steep. With demand from banks, FPIs and the RBI likely to moderate, the 10-year government bond yield is expected to trade between 6.60% and 6.85% in the first half of FY27.
