The Union Budget 2026–27 signals a slower pace of fiscal consolidation, with the government opting for a more gradual reduction in the fiscal deficit amid weakening tax buoyancy, according to DK Srivastava, Chief Policy Advisor at EY India.

Srivastava said the Budget has moderated the pace of deficit reduction after a sharper correction in the previous year. The fiscal deficit is budgeted at 4.3% of GDP for FY27, a marginal improvement of 10 basis points from 4.4% in FY26 (revised estimate). This follows a larger consolidation of 40 basis points achieved between FY25 and FY26, when the deficit was brought down from 4.8% of GDP.

“The pace of fiscal consolidation has moderated in the FY27 Budget,” Srivastava said, pointing out that the sharper adjustment seen earlier has given way to a more cautious approach this year.

Medium-term debt target remains intact

Over the medium term, the government has reaffirmed its commitment to fiscal discipline, targeting a reduction in the debt-to-GDP ratio from an estimated 55.6% in FY27 to around 50%, plus or minus 1%, by FY31. This implies a steady but stretched consolidation path over the next four years rather than aggressive near-term correction.

Falling tax buoyancy constrains faster consolidation: EY India

According to Srivastava, the primary reason for the slower pace of consolidation is a decline in the government of India’s gross tax revenue (GTR) to GDP ratio. The ratio has fallen steadily from 11.5% in FY25 to 11.4% in FY26 (RE), and is projected to decline further to 11.2% in FY27 (BE).

“This moderation is due to a fall in the GTR-to-GDP ratio,” he said, adding that the trend reflects weakening tax buoyancy rather than an expansionary shift in fiscal policy.

Data shared by EY show that tax buoyancy, a key indicator of how tax revenues respond to economic growth, has been on a downward trajectory. It declined from 0.98 in FY25 to 0.93 in FY26 (RE), and is budgeted at 0.8 in FY27. A buoyancy of less than one suggests tax revenues are growing slower than nominal GDP.

Economists say the fall in buoyancy could be linked to multiple factors, including tax rate rationalisation, subdued corporate profitability in some sectors, and normalisation of post-pandemic revenue gains. While the Budget maintains spending discipline, weaker revenue growth limits the scope for faster deficit reduction without cutting expenditure.

The FY27 Budget appears to balance fiscal prudence with growth support, keeping consolidation on track while allowing room for public spending. However, experts caution that achieving the medium-term debt target will depend heavily on reviving tax buoyancy and sustaining nominal GDP growth in the coming years.

As global economic uncertainties persist, the government’s ability to strengthen revenues without burdening taxpayers will be crucial in meeting its fiscal roadmap.