Time for an Economic Reset

As the Indian government unveils its 2026-27 Union Budget, the country’s economic trajectory is poised for a significant recalibration. The forthcoming budget represents not just another annual financial blueprint but also a critical platform to signal India’s transition from post-pandemic recovery onto a sustainable path of growth-oriented fiscal management to achieve the Viksit Bharat objective by 2047. 

Post the initial COVID shock, India has displayed remarkable fiscal prudence in gradually scaling back the pandemic-era stimulus, along with reinvigorating its appetite for reforms. Although the level of deficit/debt for India remains higher than its peers in advanced/emerging economies, the fiscal management post-COVID has been commendable.

Note: Data sourced from the IMF Fiscal Monitor. Figures for 2018-19, 2020-21, and 2024-25 represent the average values over the two years.

India’s notable prudent fiscal management in recent years has earned global acknowledgement. Between May and September 2025, three international rating agencies—Morningstar DBRS, S&P, and R&I—upgraded India’s sovereign credit rating to BBB from BBB low, BBB from BBB-, BBB+ from BBB earlier, respectively. Undoubtedly, this underscores global confidence in India’s medium-term growth prospects amid prevailing global uncertainties that will further facilitate India’s ability to achieve debt management goals.

We believe the finance minister will continue to uphold the ethos of prudent fiscal policy management, essential to remain steadfast towards preserving domestic macro stability. With this backdrop, we expect the 2025-26 fiscal deficit target of 4.4% of GDP to be met despite some challenges on realisation of the budgeted tax revenue—the shortfall can be traced to cyclical factors like slower-than-budgeted Nominal GDP growth and structural tax announcements providing relief on Income Tax and the GST.

The Union Budget will be crafted amidst four significant economic resets that could be in the offing.

• Pivot in the fiscal policy target anchor: As indicated by the finance minister in her budget speech last year, the fiscal policy strategy will see a shift in 2026-27, with gross debt replacing fiscal deficit as the operational policy tool. This is expected to provide flexibility to the government in building buffers and creating “requisite space for growth-enhancing expenditures”. Since computation of gross debt includes off-budget liabilities, this also aligns well with the government’s recent steps “to promote fiscal transparency through proper disclosure of off-budget borrowings”. 
  • We expect the finance minister to aim for a gradual reduction in the gross central government debt-to-GDP ratio from 2025-26 budget estimate of 56.1% to 55.1% in 2026-27.
  • We also expect the medium-term target for gross central government debt to be reiterated at 50% of GDP (with an embedded flexibility of 1% of GDP on either side), which is to be achieved by 2030-31.
    
    
• Medium-term fiscal relationship framework between the Centre and States: The 2026-27 Union Budget could potentially be guided by recommendations by the Sixteenth Finance Commission report, which was submitted to the government on November 17, 2025. The report was mandated to provide recommendations for a 5-year period starting 2026-27 on the distribution of the net proceeds of taxes between the Centre and the States—vertical devolution—as well as the allocation between the states—horizontal devolution—of the respective shares of such proceeds, grants-in-aid to States, review arrangements on financing Disaster Management initiatives, etc.
  
  
• External trade facilitation: To expedite the conclusion of the anticipated trade deal with the US, it would perhaps become imperative for India to revamp its customs duty framework, including the non-trade barriers. In this context, we expect the 2026-27 Union Budget to notify critical changes to the existing customs duty framework. This would be consistent with the long-standing demand for correcting the inverted duty structure in several manufacturing sectors and promoting ease of doing business.
  
  
• Revamping of key national economic statistics: The National Statistics Office will be revamping key economic data, like the GDP, IIP, CPI, and WPI for India, over the next few months. It is also likely to introduce a PPI-based price indicator. Enhancement in methodology and data coverage is expected to improve the data inferences and could have a statistical bearing on the overall fiscal arithmetic..

In addition, the 2026-27 Union Budget will perhaps take on board a few practical restraints while capitalising on the opportunities. At the outset, the dividend income from the RBI and the telecom spectrum revenue could be lower on account of an anticipated negative BoP outturn in 2025-26—on account of subdued capital flows—and the fiscal forbearance extended to one of the telecom operators. In addition, the annualised GST revenue foregone impact from the structural revamping exercise in September 2025 could linger on for some time before the system and stakeholders get completely acclimatised. The above factors could see a favorable offsetting impact from the likelihood of an improvement in tax buoyancy with normalisation of extremely subdued inflation, resulting in an acceleration in nominal GDP growth to 10.4% in 2026-27 from an estimated level of 8.0% in 2025-26. In addition, the government could also step up its monetisation agenda somewhat—the much-talked-about IDBI Bank disinvestment perhaps could get executed in the first quarter of 2026-27 and thereby set the tone for the rest of the year. Last, but not least, 2026-27 probably provides the final opportunity to maintain a sturdy capex disbursal momentum of 3% of GDP, which would be almost double the rate seen in the pre-COVID average of 1.7% between 2016-17 and 2019-20 —the imminent payout following the implementation of the Eighth Pay Commission recommendations will likely crowd out capex allocation in the 2027-28 Union Budget.  

Market Implications
We expect the 2026-27 Union Budget to imply gross and net borrowings via dated securities of ₹16.2 trillion and ₹10.7 trillion for 2026-27 against ₹14.6 trillion and ₹10.6 trillion in 2025-26, respectively. While the increase in net G-sec borrowing over 2025-26 is expected to be muted, at just 0.7%, it will be significantly larger at 10.8% for gross borrowing due to high redemption pressure of ₹5.5 trillion in 2026-27. 

As a ratio to GDP, the projected net G-sec issuances come to 2.7% vs. 3.0% in 2025-26. This would be the lowest issuance of net G-secs on a fresh basis in the post-COVID period, though it would be marginally above the pre-COVID levels of about 2.4%. This is likely to provide relief to the bond market. However, market sentiment remains fragile amidst concerns over states’ fiscal sustainability, with the recent heavy supply of SDLs dampening investor appetite. A recalibration of the fiscal federalism framework, considering the changing expenditure pattern—for example, most states will now have to contribute a higher share of 40% in the central government’s rechristened VB-G RAM G scheme vs. 10% earlier—will need to be put in place for greater synergy.

Ahead of the 2026-27 Union Budget, the government undertook significant steps in reducing the tax burden to spur domestic consumption. A revamp in the import duty framework will now complete the unfinished task of rationalising taxes and duties. The finance minister is expected to focus on creating the ecosystem to nurture India’s manufacturing prowess in emerging sectors and making India a more meaningful player in the global supply chain. In essence, the Union Budget will likely set the tone for India’s economic resilience over the next decade, balancing consolidation with expansion and transparency, and signalling the economy’s readiness to reset and reboot its economic engines.