Budget 2026: Fiscal Deficit May Remain Unchanged at 4.4% in FY27, Says Nuvama
As India prepares for the Budget 2026, financial analysts at Nuvama suggest the government may adopt a cautious fiscal approach for the following year. According to their latest report, the finance minister might refrain from further tightening the fiscal stance in FY27, potentially keeping the deficit unchanged at the FY26 level of 4.4% of GDP.
Fragile Economic Recovery and Policy Support
The report indicates that while the Indian economy appears to be nearing a bottom, the momentum remains fragile. Tax cuts announced in 2025 have boosted consumption in specific sectors, but this has not translated into a broader demand revival. Spending cuts are expected to help the government meet its FY26 gross fiscal deficit target of 4.4% of GDP.
Highlighting the need for coordinated policy measures, Nuvama stated, "For FY27, monetary easing done so far must be complemented with fiscal support to enhance its effectiveness. Hence, while fiscal expansion is unlikely, we forecast the FM would refrain from further consolidation in FY27."
Alternative Growth Strategies
With limited fiscal room, the government may need to explore other avenues to stimulate growth. The report suggests:
- Large-scale disinvestments to raise capital
- Encouraging public sector undertakings (PSUs) to increase capital expenditure, which has been subdued for years
- Implementing non-fiscal measures such as deregulation, credit-guarantee schemes, and initiatives to improve ease of doing business
A potential credit guarantee scheme for microfinance institutions (MFIs) could also be considered to support low-income borrowers.
Market Implications and Sector Focus
From a market perspective, higher development spending and increased capex would be positive signals. However, Nuvama warns these measures may not be sufficient to arrest the earnings downgrade cycle. The brokerage maintains a defensive stance, noting that margins could see mean reversion and external headwinds remain a key risk.
Any changes to capital gains taxation could significantly influence market sentiment in the near term. While FY26 priorities focused on boosting consumption through tax rationalization, FY27 may shift towards encouraging investment through deregulation.
The report expects continued attention on key sectors including:
- Semiconductors
- Artificial Intelligence and robotics
- Exports
Overall Outlook
Overall, Nuvama anticipates the FY27 Budget could be mildly supportive for growth, though the pace of recovery is likely to remain modest. The government's balancing act between fiscal prudence and economic stimulus will be crucial in navigating the fragile recovery phase.
