SBI Research's Pre-Budget Assessment: India's Fiscal Strategy Amid Global Turbulence
The Union Budget for the fiscal year 2026-27 is being formulated against a backdrop of increasing global fragility, characterized by geopolitical shifts, volatile financial markets, and a significant rally in commodity prices. According to a comprehensive pre-Budget assessment by State Bank of India Research, India is anticipated to preserve its macroeconomic stability through a carefully calibrated fiscal strategy and sustained public investment.
Global Context and Domestic Projections
SBI Research notes that the Budget emerges during a period when "the domino effects of a new emerging order of realpolitik" are reverberating across international markets. The report observes stretched equity and bond valuations, which reflect what it terms "misplaced trust," even as a risk-on rally gains momentum in commodities, particularly precious metals. A primary uncertainty highlighted is whether crude oil prices might escape from what the report describes as an "artificially managed supply glut."
In this challenging environment, SBI Research forecasts nominal GDP growth for Budget calculations to be approximately 10.5–11% in FY27. The assessment cautions that rising international commodity prices could permeate into wholesale inflation. Based on this projection, the fiscal deficit is estimated at about 4.2% of GDP, though the bank acknowledges that the new GDP series might recalibrate fiscal calculations.
"A bit slower nominal growth may hurt tax revenues in FY27, requiring better expenditure planning," the report states. It suggests that GST rationalization and potential reductions in marginal personal income tax rates could help alleviate pressures on the tax base.
Government Borrowing and RBI's Role
Regarding government borrowing, SBI Research anticipates net central borrowing to reach Rs 11.7 trillion in FY27, accompanied by repayments of Rs 4.87 trillion. State gross borrowings are projected to increase to Rs 12.6 trillion, with repayments of Rs 4.2 trillion.
"RBI would need to do much more OMOs to balance the borrowing requirements," the report emphasizes, underscoring the expanding role of liquidity management as market borrowings grow. Over the medium term, SBI estimates gross market borrowing to range between Rs 93.8–95.2 lakh crore over the next five fiscal years, averaging Rs 18–19 lakh crore annually, which is substantially higher than the current rate.
This scenario makes it "imperative that government also looks at borrowings through alternative and enhancing sources like small savings," the report adds.
Capital Expenditure as Growth Fulcrum
Public investment is expected to remain the cornerstone of India's growth strategy. SBI Research indicates that government capital expenditure may exceed Rs 12 lakh crore in FY27, implying a year-on-year increase of roughly 10%.
While tax revenues are likely to exhibit only modest growth and non-tax revenues may remain stagnant, the bank believes that continued capex will help sustain domestic demand and attract private investment.
Debt Consolidation and State Finances
SBI Research also addresses the Centre's medium-term fiscal consolidation path, projecting central government debt-to-GDP to decrease from 57.1% in FY25 to 56.1% in FY26. There is an explicit commitment to steer debt onto a declining trajectory towards approximately 50% of GDP by March 2031, barring major external shocks.
The report advocates for institutionalizing a similar framework at the state level, noting that states constitute a significant portion of general government debt. "State budgets should explicitly chart medium-term, preferably scenario-based, debt-to-GSDP trajectories, aligned with realistic growth assumptions and development needs, rather than relying solely on annual deficit targets," it recommends, suggesting this could be emphasized in the Budget speech.
Taxation, Savings, and Structural Reforms
On taxation, SBI Research proposes reforms to enhance household financial savings, including:
- Parity in tax treatment of interest on deposits with capital gains
- A shorter lock-in period for tax-saving fixed deposits
- A higher TDS threshold on savings account interest
The report also calls for a "plethora of reforms" in the insurance and pensions sector to improve penetration. It raises concerns about health insurance claims, citing IRDAI data showing that around 69% of complaints in FY25 were claim-related, with citizens often facing delays in settlements.
With escalating climate risks, SBI Research highlights that India faces a protection gap of nearly 93% for natural disasters between 1991 and 2025. This underscores the need for a public-private disaster risk pool involving insurers.
Additionally, the report advocates for transitioning to a risk-based capital framework in insurance, moving away from "static, formula-driven, one-size-fits-all solvency margins" to a more dynamic, risk-aligned approach.
India as a Global Bright Spot
Despite turbulence in global markets, SBI Research affirms that India continues to stand out as a bright spot, bolstered by robust macro fundamentals. The challenge for Budget 2026–27, it notes, will be to balance fiscal consolidation with growth imperatives while navigating an uncertain global landscape.
