New Delhi: India’s Union budget for FY27 marks a clear shift in the Centre’s fiscal framework, with the government formally moving from a focus on annual fiscal deficit reduction to a debt-to-GDP regime of budget discipline that is designed to absorb external shocks without derailing medium-term consolidation.
The new approach comes after the Centre sharply reduced its fiscal deficit from pandemic-era highs, and at a time of rising global uncertainty driven by trade disruptions, geopolitical risks and volatile capital flows.
Finance minister Nirmala Sitharaman said in her budget speech on Sunday that the central government is estimating its debt at 55.6% of nominal GDP for the next financial year. The target, she added, is to bring it down to 50% — give or take one percentage point — by FY31, as she had indicated in her previous budget.
That will be an improvement over the debt-to-GDP ratio of 56.1% estimated in the revised estimate for FY26, the minister said.
The new debt-to-GDP-anchored regime comes after the Centre brought down the fiscal deficit — the gap between revenue receipts and spending met through borrowings — from 9.2% in the pandemic year of FY21 to 4.4% in the revised estimate for FY26. In absolute terms, the fiscal deficit for FY27 at ₹16.9 trillion is higher than the ₹15.58 trillion estimated for this fiscal.
“The shift in the fiscal goalpost from fiscal deficit to debt allows the government more discretion in managing the fiscal deficit, such that deficit reduction may even pause in a few years, enabling countercyclical fiscal support, especially during periods of shock,” said Dipti Deshpande, principal economist at Crisil Ltd.
Budget documents were unambiguous about the need for the transition. Fiscal policy would focus on building strong macro-economic fundamentals that can withstand exogenous shocks and global uncertainties, it said. Fiscal deficit in each year will be set such that central government debt is on a declining path.
Budget documents said that India’s growth outlook is positive, backed by strong domestic demand, structural reforms, and a stable macroeconomic environment, as endorsed by three sovereign rating upgrades during the year.
While the outlook on price rise remains benign, public investments, deregulation, labour market reforms, investments in health and education, strong private sector balance sheets, and tax reforms are expected to drive the economy into a higher growth trajectory, the budget noted.
Yet, the government is forthright about the risk from US tariffs. “One risk factor is the persistence of high tariffs on exports to the USA. It also affects investor sentiment, keeps capital inflows into India restrained, and forces Indian businesses to invest in lower-tariff jurisdictions or in the United States itself to cater to the large US domestic market,” the government’s fiscal policy strategy statement said.
While net capital inflows keep the rupee under pressure, free trade agreements and trade diversification partially mitigate the impact of high American tariffs, the statement said.
“While the global growth is expected to be steady, the momentum is uneven and risks remain tilted to the downside. Global stability is based on a fragile balance of trade policy positions that are continuously shifting. Geopolitical flare-ups and possible escalation in tensions across continents could further upset this balance through supply chain and trade route disruptions, influencing investor sentiments,” the statement said.
It added that against this backdrop, the government will continue its fiscal consolidation path while making all efforts to achieve inclusive, equitable and sustainable growth.
The new fiscal anchor is being adopted after the sharp tax reductions offered to individuals on incomes from this year and on consumption in the form of GST rationalisation effective from 22 September 2025.
D.K. Srivastava, chief policy advisor at EY India, said the pace of fiscal consolidation has moderated in the FY27 budget. After achieving a reduction of 40 basis points from 4.8% of GDP in FY25 to 4.4% in the revised estimates for FY26, the reduction in the FY27 budget estimate is only 10 basis points, taking the FY27 fiscal deficit to 4.3% of GDP, said Srivastava.
The government has assumed nominal GDP to grow 10% in FY27 to ₹393 trillion.
Sanjeev Krishan, chairperson, PwC in India, said the Union budget reinforces a clear shift towards an outcome-based, debt-anchored fiscal strategy, signalling steady consolidation.
“India is balancing discipline and development; fiscal consolidation and a sustained multi-year push on public capital expenditure are happening in parallel. This combination of fiscal discipline with higher quality spending underpins inclusive, durable growth,” said Krishan.
“The ambitious target of a 50% debt-to-GDP requires sweating existing assets, crowding in private investment, and a relentless pursuit of productivity across infrastructure, enterprises, and the government,” added Krishan.
The ₹53.4 trillion budget assumes moderation in revenue spending growth to 6.6% in FY27, compared to the 7.4% growth seen in FY26 as per revised estimates. At the same time, it seeks to enhance capital expenditure by 11.5% to ₹12.2 trillion and effective capital expenditure of the Centre by 22% to ₹17.1 trillion.
This is achieved by enhancing grants to states for capital asset creation to ₹4.92 trillion next fiscal, compared to the ₹3 trillion likely to be spent in the current year. This year, the off take of this funding by states has moderated from the ₹4.2 trillion allocated at the beginning of the year.
Being the first year of the 16th Finance Commission (SFC) award period, the FY27 budget reflects the Commission’s recommendation of continuing the devolution of 41% of central tax revenue to states. For FY27, there is no ‘post-devolution revenue deficit grant’ to states. For FY26, the Centre has earmarked ₹13,705 crore to states in this regard.
Centre’s corporate tax revenue is expected to grow at 12.4% in FY27, while income tax revenue receipt is expected to grow 6.2% from the revised estimates for the current fiscal.
In the current fiscal, the Centre is likely to miss its disinvestment target of ₹47,000 crore as the revised estimates show only ₹33,837 crore is likely to be realised by March-end. However, for the next fiscal, a target of ₹80,000 crore has been kept under ‘miscellaneous capital receipts’.
A government official said at a post-budget briefing that the Centre is on track and is fully committed to completing the planned ones, which explains why aspirational targets are kept.
For FY27, the government has estimated ₹44 trillion of gross tax revenue (before devolution to states), of which ₹26.97 trillion is expected from direct taxes and ₹17.07 trillion from indirect taxes. For FY27, non-tax revenue of ₹6.66 trillion is estimated.
