Union Budget 2026-27: GDP Slowdown Weighs on Tax Collections but Fiscal Prudence Maintained

The FY27 Union budget did not deliver any major policy reform or any lucrative freebie for consumers. It rather remained focussed on charting a growth-oriented roadmap for “Viksit Bharat”. It was unequivocally reflected in the highest-ever capex allocation of INR 12.72trn (+11.5% YoY) while maintaining a fiscal deficit target of 4.3% (-10bps YoY) for FY27BE. The budget prioritized manufacturing growth through special programmes for semiconductors, metals, biopharma, container manufacturing, textiles, chemical parks, electronics manufacturing and MSMEs. However, raising the STT on futures and options under current market participants.

• Revenue: There was a marked improvement in corporate income tax collection, which grew at 12.4% in FY26RE as compared to the estimated 9.7% in FY26BE and 8.3% recorded in FY25. On the other hand, individual income tax collection declined sharply to 6.2% in FY26 due to tax slabs rationalisation and a nominal GDP slowdown, as compared to FY26BE estimates of 16.4% and a growth of 18.2% in FY25. This personal income tax slowdown led to a subdued overall tax growth of ~9% in FY26RE (13.4% growth estimated in FY26BE). On the indirect taxes front, GST collection growth also remained subdued at ~2% in FY26RE (14.7%), while customs and excise grew strongly at 11.5% in FY26RE benefiting from FY26 budget estimates of 4.4%. As a result, overall net tax revenue to the centre delivered a significant miss at 7% growth in FY26RE (FY26BE: 13.5%).
• Expenditure: The shortfall observed in revenue collection led to lower-than-estimated growth for rural development (FY26RE: 3%, FY26BE: 30%), urban development (FY26RE:7.4%, FY26BE: 82%), and telecom & IT. Due to emergency procurement, defence allocation was higher than estimates (FY26RE: 26%, FY26BE: 9%). Expenditure toward food and fertiliser subsidies was also higher than budget estimates (FY26RE: 11.6%, FY26BE: 0%). FY27BE is expected to witness higher allocation toward rural development, transport, education, urban development, T& telecom, and energy while subsidies will witness a YoY degrowth.
• The capex budget is estimated to grow by 11.5% to INR 12.7trn in FY27BE as against INR 10.95trn achieved in FY26RE (-9% of FY26BE). With IEBR, Capex is estimated to grow to INR 14.3trn in FY27BE (+11.7% as against FY26RE). While aggregate capex budget for FY27 is expected to grow steadily at a pace like previous years, the focus on various sectors viz. road transport, railways, defence, and power contribute ~65% of overall FY27BE capex.
• It is worth noticing that capex budget growth for road transports and railways were flattish as the rationale to growth is maintained to grow at 8-1% and 10.5%, respectively in FY27BE. Led by the rising need of sovereign protection in the wake of geopolitical uncertainties, defence budget allocation has gone up by 17.0% YoY in FY27BE. Loans to states for capex grew massively by 30% in FY27BE to INR 2.0 trn vis-à-vis FY26RE. In our view, government’s strategy of bringing investment led growth in the country is being executed without any deterrence. As fiscal deficit is also under control, we can expect capex to grow steadily in the coming years as well.
• Subsidies towards fertiliser, food and petroleum are projected to decline marginally by ~5% to INR 4.1 trn in FY27BE as against FY25RE. Food subsidy budget will decline by INR ~8% to INR 1.7bn in FY27BE coupled with flattish allocation of ~INR 2.2trn towards fertiliser.
• Delivering a fiscal deficit of 4.4% for FY26RE is a welcome achievement, as it has improved from 9.1% in FY21 steadily without compromising on the capex, which has grown approx. three-fold in the same period. Clinching with demonstrated fiscal prudence so far, government has estimated fiscal deficit for FY27BE at 4.3% of GDP. With current debt to GDP ratio of ~55.6%, government aims to reach a level of 50% by FY31. The fiscal deficit estimate for FY27BE rests on key assumptions (explained further).
• Realistic nominal GDP growth of 10.0% in FY27BE vis-à-vis 8% in FY26RE. It can be noted that real growth recorded in FY26 was 7.4% but subdued inflation led low GDP deflator brought down nominal growth. Real GDP is estimated to grow between 6.8–7% p.a. in FY27BE and inflation is projected to bounce back to ~3.5% average levels in FY27.
• Conservative estimates of 7.2% growth in net tax revenue to Centre in FY27BE (7% in FY26RE), despite estimated rise in nominal GDP growth. This is projected to be led by ~11.4% and 12.8% YoY growth in direct tax and customs & excise duty respectively; while GST is estimated to degrow by ~3% YoY in FY27BE. Dividends from RBI and PSUs are INR 3.16trn and INR 750bn respectively in FY27BE (as against INR 3.05 trn and INR 710bn respectively in FY26RE). Further, gross tax to GDP is projected to decline to 11.2% in FY27BE from 11.4% in FY26RE (direct tax growth only 10 bps to 6.9%, indirect tax reducing by 40 bps to 4.3%).
• In our view, net tax revenue to the center has upside risk as nominal GDP grows faster in FY27 vis-à-vis FY26 with the help of inflation and a realistic expectation of ~7% real GDP. Further, aligning with the recent trends, RBI, and PSU dividends are expected to be met. Additionally, the assumption of a 3% YoY loss on GST collection also seems aggressive and compliance increases due to slab rationalization. Hence, overall fiscal deficit target is expected to be met.
• For financing this fiscal deficit, gross market borrowing is projected to increase to INR 17.2trn in FY27BE vis-à-vis INR 14.6trn in FY26RE, a 17.8% growth. At the face of it, it appears to be a detrimental to government’s fiscal prudence, but considering higher repayment estimated this fiscal (46% YoY growth), it can be concluded that net market borrowing is estimated to rise by a miniscule ~3.6% in FY27BE vis-à-vis FY26RE. Reliance on small savings securities is still significant (~23.5% of debt receipts in FY27BE, as against 24.6% in FY26RE). We believe benign fiscal deficit of FY26RE and lower estimates for FY27BE (by 10 bps) will keep 10-year bond yields subdued in the medium term.

Union Budget 2026-27: Key Policy Announcements

• Electronics Components Manufacturing Scheme: Outlay has almost doubled to INR 400bn to capitalize on received investment commitments far outpacing the target.
• Railway corridors: To promote sustainable passenger systems, seven high speed rail corridors are being developed between major cities as ‘growth connectors’.
• Restructuring of PFC and REC: Under the Viksit Bharat vision for NBFCs, restructuring of PFC and REC is taking place as the first step to enhance scale and efficiency.
• Biopharma SHAKTI: With an outlay of INR 100bn Biopharma SHAKTI has been proposed to develop India as a global Biopharma manufacturing hub.
• Rare Earth Permanent Magnets Scheme: Dedicated Rare Earth Corridors are being established across four states to promote self reliance through mining, research, and manufacturing.
• Increase in STT: STT on Futures has been increased 0.05% from 0.02%. Also, STT on premium and exercise of options are raised to 0.15% from 0.1% and 0.125%, respectively.
• Attracting Investments in Data Centers: Tax holiday proposed up to 2047 for any foreign company procuring data center services from India.
• Buyback tax: Buybacks will now be taxed as capital gains which will make them more tax efficient than dividends for distribution of share of profits.
• Container Manufacturing Scheme: A scheme is introduced with an allocation of INR 100 bn over 5 years to create a globally competitive container manufacturing ecosystem.
• Union Budget FY27 reflects the government’s undeterred focus on uplifting economy through long term sustainable investments, without compromising on fiscal policies. Overall, in our view, the government has delivered a balanced budget without any major reform but has provided adequate support to high growth niche sectors such as biopharma, data centres, rare earth metals, chemicals and textiles.
• Sector impact: Positive for industrials, EMS, mining, infrastructure, and pharmaceuticals. Neutral for consumers.

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