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FY27 Budget: Capex Focus, Fiscal Prudence, and Limited Surprises Expected

The Union Budget for FY27 is expected to prioritize capital expenditure and continued fiscal consolidation, with the fiscal deficit projected around 4.2-4.4% of GDP. Key spending areas will include defence, roads, and railways, with market borrowings potentially coming in lower than consensus estimates. The accompanying 16th Finance Commission report will be closely watched for its fiscal roadmap for states and any tax devolution changes. While major surprises are unlikely, the budget may still deliver selective positive measures for investors and the manufacturing sector.

Key Points: FY27 Budget Preview: Capex, Fiscal Deficit, and Market Outlook

  • Fiscal deficit target of 4.2-4.4% of GDP
  • Capex focus on defence, roads, railways
  • Lower-than-expected market borrowings possible
  • 16th Finance Commission report key to watch
  • Reforms for investors and manufacturing
3 min read

FY27 budget to prioritise capex, fiscal prudence; limited upside surprises likely: UBI

Union Bank of India's pre-Budget note forecasts continued fiscal consolidation, a capex push, and potential lower market borrowings for FY27.

"We see fiscal consolidation to continue in FY27, albeit at slower pace, to 4.2% of GDP - Union Bank of India report"

New Delhi, January 31

With the Union Budget for FY27 scheduled for Sunday, expectations are tamed even as markets remain alert to the possibility of selective positive surprises, according to a pre-Budget note by Union Bank of India.

The report notes that while the Government does not wait for the Budget to announce key reforms, the Budget continues to be a crucial policy document, especially at a time when most major policy announcements are already under execution.

UBI expects fiscal consolidation to continue in FY27, albeit at a slower pace. The fiscal deficit is projected at 4.2-4.4 per cent of GDP, with the bank stating, "We see fiscal consolidation to continue in FY27, albeit at slower pace, to 4.2% of GDP, in order to preserve policy space in an uncertain world & ahead of Pay Commission implementation in FY28."

The report highlights a likely transition towards a debt-to-GDP targeting framework, noting that the Centre aims to transition to a debt management approach from FY27 with an endeavour to reduce debt to GDP to around 50+-1 per cent by FY31.

Despite pressures on revenues from earlier tax cuts and the discontinuation of the GST compensation cess from February 1, 2026, policy priority is expected to remain firmly on capital expenditure. UBI projects FY27 capital expenditure at Rs 12.4 lakh crore, or about 3.2 per cent of GDP, with defence, roads and railways remaining key focus areas.

The report states that capex push and revex rationalisation are expected to be the main drivers of fiscal consolidation in FY27.

On market borrowings, UBI sees room for lower-than-expected numbers. While market consensus pegs FY27 gross borrowings in the range of Rs 15.5-16.5 lakh crore, the bank's baseline estimate is at the lower end.

"Despite low probability of an 'optimistic' scenario, we propagate the same," the report says, adding that there is space to show lower gross and net borrowing numbers of around Rs 15.5 lakh crore and Rs 10.5 lakh crore, respectively.

The 16th Finance Commission report, to be tabled along with the Budget, is expected to be closely watched. While market expectations point to minor changes in tax devolution, the report flags the possibility of more substantive reform signals.

UBI notes "macro urgency to have a handle on states' finances," and says the Commission may lay down a "fiscal roadmap for states targeting fiscal deficit to come down to sub-3% of GSDP in a prescribed time period."

Beyond fiscal arithmetic, the report says reform announcements will be a key focus of the Budget. These include measures to make bank deposits more attractive, steps to "lay the red carpet for foreign investors," promotion of sectors like defence amid geopolitical uncertainty, and customs duty rationalisation to boost manufacturing and ease of doing business.

Summing up, UBI notes that while the Finance Minister is known for being conservative & credible, the upcoming Budget still carries the possibility of selective favourable surprises for markets and the macro outlook.

- ANI

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Reader Comments

P
Priya S
Fiscal prudence is important, but with an eye on the Pay Commission next year, I hope there are some positive signals for middle-class taxpayers. A little relief in income tax slabs would go a long way in boosting consumption.
R
Rohit P
The debt-to-GDP target of 50% by FY31 is a very ambitious goal. Given global uncertainties, it's a tightrope walk between spending for growth and managing debt. Let's see if the Finance Minister can pull it off.
S
Sarah B
As someone following the markets, lower-than-expected borrowings would be a very positive surprise. It could ease pressure on bond yields and be good for the overall financial sector. Fingers crossed for that "optimistic scenario" UBI mentions.
V
Vikram M
The focus on making bank deposits attractive is crucial. With so much money in speculative assets, we need to bring savings back to the formal banking system for stable growth. Hope the budget has concrete steps for this.
K
Karthik V
While the emphasis on fiscal consolidation is understandable, I have a respectful criticism. In a country with our level of inequality, sometimes aggressive deficit reduction can come at the cost of social sector spending. The 16th Finance Commission's roadmap for states must not cripple their ability to fund health and education.
A
Ananya R

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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