A recent report by HSBC Global Investment Research revealed that despite lower revenue as a share of GDP, the government’s reduction in subsidies and spending on ongoing schemes has led to the smallest fiscal consolidation in six years. This trend is anticipated to have a positive impact on economic growth. Fiscal consolidation for the fiscal year 2027 is reported to be the slowest in six years, with a notable increase in budgeted disinvestment, marking a six-year high.
The report emphasized the government’s commitment to fiscal consolidation, albeit opting for a more gradual approach for the fiscal year 2027. This shift is expected to neutralize the fiscal impulse, which has been negative for several years, potentially benefiting GDP growth. The Budget notably focused on the services sector, allocating increased funds for medical institutions, universities, tourism, sports facilities, and the creative economy.
Furthermore, the report highlighted a renewed emphasis on urban infrastructure, with each City Economic Region (CER) slated to receive Rs 50 billion over five years. Additionally, plans for seven new high-speed rail corridors to connect major cities were outlined, along with incentives for large cities issuing municipal bonds exceeding Rs 10 billion. The government’s policy priorities included incentivizing new manufacturing sectors such as biopharma, semiconductors, electronic components, rare earth corridors, chemical parks, container manufacturing, and high-tech tool rooms.
In terms of tax revenue projections, the report indicated that direct taxes are expected to outpace nominal GDP growth, while indirect taxes will see a slower expansion. Gross tax revenues are budgeted to increase by approximately 8% year-on-year. The central government has set a fiscal deficit target of 4.3% of GDP for the fiscal year 2027, following a 4.4% estimate for the previous fiscal year, with nominal GDP growth projected at 10%.
