India is expected to maintain its strong macro fundamentals, with the government’s capital expenditure likely to exceed Rs 12 lakh crore in FY27, marking a 10% year-on-year increase, as per a report by SBI Research. The nominal GDP growth crucial for budget calculations is anticipated to be around 10.5-11%, influenced by rising global commodity prices that could impact the Wholesale Price Index positively. Dr. Soumya Kanti Ghosh, the Group Chief Economic Advisor at State Bank of India, mentioned that a slightly slower nominal growth might impact tax revenues in FY27, necessitating improved expenditure planning. However, the expected GST rationalization and reduction in marginal tax rates for personal income tax are likely to mitigate the effects of a sluggish tax base.
A fiscal deficit of 4.2% of GDP for FY27 is projected based on the aforementioned nominal forecast. The government’s borrowing costs are estimated to range between 6.8-7.0% for FY27, with risks evenly balanced, according to Ghosh. The net Central borrowing for FY27 is forecasted at Rs 11.7 trillion, approximately 70% of the fiscal deficit, with repayments of Rs 4.60 trillion, including an anticipated buyback of Rs 1 lakh crore and estimated switches of Rs 1.5 trillion. State gross borrowings are expected to reach Rs 12.6 trillion, with repayments of Rs 4.2 trillion.
The report suggests the potential reduction of State Development Loans (SDLs) and consequent net state borrowings through substantial reforms, along with increased borrowing through Treasury Bill issuance. The Government and the RBI may need to collaborate to implement meaningful reforms in the SDL market due to these substantial borrowings. The unveiling of the Union Budget 2026 occurs amidst a changing global political landscape, impacting financial markets worldwide, with trust issues causing turmoil in stretched equities and bond markets.
The report emphasizes the need for state budgets to outline medium-term debt-to-GSDP trajectories, aligned with realistic growth assumptions and development requirements, rather than solely focusing on annual deficit targets, given the significant share of general government debt held by states. This aspect may be highlighted in the upcoming Union Budget.
