Budget 2026: Govt likely to peg FY27 fiscal deficit at 4.2%, says Standard Chartered Global report

As the Union Budget for 2026–27 draws closer, the Centre is expected to remain committed to fiscal consolidation while continuing to support economic growth amid global uncertainty, according to a report by Standard Chartered Global Research. 

The report projects that the government will adhere to its fiscal deficit target of 4.4% of GDP in FY26 and further reduce it to around 4.2% in FY27. However, it notes that the pace of consolidation is likely to moderate compared with the sharp correction between FY23 and FY26, during which the deficit was narrowed by more than two percentage points of GDP. 

“We expect the central government to target a FY27 fiscal deficit of 4.2% of GDP while adhering to the FY26 target of 4.4%. The pace of consolidation was much faster from FY23-26 with a consolidation of 2.1% of GDP (Figures 1, 6 and 17),” the preview said. 

GST revenues to support spending 

A key support for this approach is the expected release of additional Goods and Services Tax (GST) revenues. GST cess collections, earlier earmarked to repay bonds issued during the pandemic to compensate states, are likely to be fully utilised or provisioned by FY26. This would free up nearly 0.3% of GDP for spending in FY27, allowing the government to maintain capital expenditure without widening the deficit. 

Capital expenditure is expected to remain steady at around 3.1% of GDP in FY27, continuing the government’s focus on infrastructure-led growth. While revenue expenditure may see some marginal compression, the report notes that subsidy spending has already declined sharply from pandemic-era highs and is unlikely to derail consolidation plans. 

Debt targets and Finance Commission impact 

Finance Minister Nirmala Sitharaman is also expected to reiterate the medium-term goal of bringing the central government’s debt down to 49–51% of GDP by FY31, from around 56% currently. Achieving this target will depend heavily on nominal GDP growth. The report notes that growth closer to 10% would allow gradual consolidation while slower growth would require sharper fiscal tightening. 

“As this is a medium-term fiscal consolidation plan, the focus is likely to remain on the nominal GDP growth trajectory, as it will be key in determining the fiscal deficit consolidation pace going forward,” the report says. 

Another important aspect of the Budget 2026 is likely to be the incorporation of recommendations from the 16th Finance Commission, which determines how resources are shared between the Centre and states. While changes in revenue sharing could affect individual budgets, the report does not expect the combined fiscal deficit of the Centre and states to change materially. 

Overall, the Budget is expected to strike a careful balance between fiscal discipline and growth, with continued emphasis on capital spending, stable revenues, and gradual deficit reduction in a challenging global environment.