Centre likely to prioritise debt consolidation, capex push in Budget 2026: ICRA
The rating agency claimed that the upcoming budget is important as it will be the first budget in line with the recommendations of the 16th Finance Commission, which will determine fiscal transfers between the Center and states for the next five years.
ICRA expects the Centre’s fiscal deficit to be limited to around 4.3 per cent of GDP in 2026-27; This is slightly lower than the 4.4 per cent budgeted for 2025-26, supported by an estimated 9.8 per cent growth in nominal GDP.
Based on this trajectory, the central government’s debt-to-GDP ratio is projected to decline from 56.1 percent in 2025-26 to approximately 55.1 percent in 2026-27, consistent with the medium-term consolidation path.
Despite the marginal improvement in the deficit ratio, the absolute fiscal deficit is expected to rise to Rs 16.9 trillion in 2026-27 compared to Rs 15.7 trillion in 2025-26.
This increase is expected to be largely driven by higher capital expenditure as the government looks to front-load infrastructure spending before fiscal rigidities intensify from 2027-28 due to the expected implementation of the 8th Central Pay Commission, which will increase salary and pension liabilities.
“We believe GoI will increase capital expenditure by ~14% (to Rs 13.1 trillion) before fiscal rigidities in the form of higher committed expenditure set from FY 2028 due to recommendations of the 8th Central Pay Commission (CPC) on salary/pension revisions for Central Government employees/pensioners,” ICRA said. ICRA projects capital expenditure to rise by around 14 per cent in 2020 to Rs 13.1 trillion in 2026-27, equivalent to 3.3 per cent of GDP, with an estimated Rs 11.5 trillion in 2025-26.
This continued emphasis on investment spending is expected to support investment activities and improve the quality of government spending.
On the revenue front, gross tax revenues are expected to grow around 7 per cent in 2026-27, led by a strong increase of 11 per cent in direct tax collections.
In contrast, indirect tax growth is expected to remain muted at around 2 per cent, reflecting the impact of cuts in GST rates introduced from September 2025.
The Centre’s net tax revenues are expected to grow by a modest 5.2 per cent to Rs 28.5 trillion in 2026-27, after central tax devolution to states is estimated at Rs 15.4 trillion.
Non-tax revenues are expected to grow by around 5 per cent, but the record dividend transfer of Rs 2.7 trillion from the Reserve Bank of India in 2025-26 is likely to moderate next year.
The growth in revenue expenditure is expected to remain around 4 percent in 2026-27, supported by slowing growth in interest payments and subsidies. As a result, the revenue gap is projected to narrow to Rs 4.7 trillion, or 1.2 percent of GDP, marking the lowest rate in nearly two decades.
However, higher capital expenditures and a sharp increase in debt redemptions are likely to increase borrowing requirements. Gross market debt is expected to increase by 15-16 per cent to Rs 16.9 trillion in 2026-27.
As in the convention, the Union Budget 2026-27 will be presented to the Grand National Assembly of Turkey on February 1, 2026.
