India's Budget 2027: Balancing Growth with Fiscal Discipline

As India readies its Union Budget for 2027, growth through capital expenditure is prioritized with a focus on deficit reduction. EY highlights India's strong economic position, driven by manufacturing and services growth. Although tax revenue growth slows, policy adjustments are anticipated to maintain fiscal targets.

As the Indian government gears up for the Union Budget of 2027, fiscal strategies aimed at bolstering growth through capital spending while adhering to deficit reduction are becoming clearer, according to a report by EY. The report highlights that India enters this critical fiscal period with robust economic fundamentals.

In the second quarter of FY26, India's Real GDP surged by 8.2%, thanks to balanced growth in both manufacturing and services sectors. With inflation at a historic low of 0.7%, policymakers have the leeway to focus on growth without inducing inflationary pressures. The government is expected to significantly increase public capital expenditure in FY27 to sustain this growth trajectory.

Between April and October FY26, capital spending rose by 32.4%, contrasting with a near-zero growth in revenue expenditure. Maintaining a 15-20% growth in capital expenditure is deemed essential for sustaining GDP growth of over 6.5% in the mid-term amidst ongoing global trade uncertainties.

Overall government expenditure increased by 6.1% during this period, driven by a modest growth of 0.03% in revenue expenditure and a robust 32.4% increase in capital spending. However, tax revenue growth fell to 4% compared to 10.8% last year, due to sluggish direct and indirect tax collections, as noted by the Controller General of Accounts.

Despite efforts to drive growth, the government's fiscal space remains limited. EY predicts adherence to the FY26 fiscal deficit target of 4.4% of GDP, aided by strong non-tax revenues, controlled spending, and measures like higher excise duties on tobacco. The fiscal roadmap for FY27 is expected to stay consistent, targeting further deficit reduction in line with the FRBM objectives.

(With inputs from agencies.)