Union Budget 2026 lowers fiscal deficit target for FY27 to 4.3%; pace of consolidation slows

In her 2026-27 Budget speech, Finance Minister Nirmala Sitharaman announced that the centre’s fiscal deficit (the amount by which its expenditure in general terms exceeds its income) has been set at 4.3% of the Gross Domestic Product (GDP) for the financial year 2026-27 and the government has targeted the debt-to-GDP ratio at 55.6%.

Follow Union Budget 2026 LIVE updates

According to experts, this signals a moderation in the Centre’s fiscal consolidation, largely due to a decline in the government’s gross tax revenue rates.

“I am happy to inform this August House that I have fulfilled the commitment I made in FY 2021-22 to reduce the fiscal deficit to below 4.5% of GDP by 2025-26,” Ms. Sitharaman said. “In line with the new fiscal prudence path towards debt consolidation, the fiscal deficit in BE (budget forecasts) for 2026-27 is estimated at 4.3% of GDP.”

Also read: Resolution of Union Budget 2026–27 | What do the numbers mean

This would require the fiscal deficit to fall from 4.4% as reported in the revised estimates for the 2025-26 financial year.

Reducing debt ratios

In her previous Budget in February 2025, Ms. Sitharaman had outlined an alternative path for fiscal consolidation by focusing on the Centre’s debt-to-GDP ratio and reducing it to 50% (with wiggle room above and below 1%) by March 2031.

“In line with this, the debt/GDP ratio was estimated to be 55.6% of GDP in BE 2026-27, while RE (revised estimates) was 56.1% of GDP in 2025-26,” Ms. Sitharaman said. “The reduction in the debt/GDP ratio will gradually free up resources for priority sector spending by reducing the expense of interest payments.”

Slower fiscal consolidation

According to DK Srivastava, chief policy advisor, EY India, the Centre’s fiscal consolidation remains moderate in this Budget.

“After achieving a 40 basis point reduction from 4.8% of GDP in FY25 to 4.4% in FY26 (RE), the decline in FY27 (BE) was only 10 basis points, taking the FY27 fiscal deficit to 4.3% of GDP,” he explained.

“This moderation is due to the decline in the ratio of gross tax revenues to GDP of the Government of India (GoI), which has gradually decreased from 11.5% in FY25 to 11.4% in FY26 (RE) and subsequently to 11.2% in FY27 (BE), implying a decline in non-debt revenues of the GoI as a percentage of GDP,” Mr. Srivastava added. Srivastava.

Solid revenue growth forecast

Budget documents show that the Centre’s net tax revenues have been budgeted at ₹28.7 lakh crore, an increase of 7.2% from the level in the revised estimates for 2025-26, after accounting for transfers to States. It is noteworthy that Budget 2026 does not include major tax cuts for salaried or corporate taxpayers.

Gross corporate tax revenue was budgeted at ₹12.3 lakh crore, 11% higher than the amount received in 2025-26 as per that year’s revised estimates. Gross income tax revenue was also scheduled to increase by 11.7% to Rs 14.7 lakh crore during the same period.

Notably, according to the revised 2025-26 estimates, income tax revenue was 8.8% lower than budgeted at the beginning of that year.

Continued growth in investment spending

On the expenditure side, the Center has budgeted a total expenditure of around ₹ 53.5 lakh crore for 2026-27; this is 7.7% higher than the revised estimates for 2025-26.

In this context, the Centre’s capital expenditure is slated to rise to ₹12.2 lakh crore for 2025-26, which is 11.5% higher than the revised estimates.

At the post-budget press conference, Ms. Sitharaman emphasized that this amounted to 4.4% of GDP, the highest level in at least the last 10 years.