New Delhi [India], January 21 : The Finance Minister, in the upcoming Union Budget 2026, is likely to refrain from further fiscal consolidation in FY27, according to a report by Nuvama.
The report said the Indian economy is bottoming out, but growth impulses remain weak. While tax cuts announced in 2025 are helping select pockets of consumption, the benefits may not spread widely due to anticipated spending cuts aimed at meeting the FY26 gross fiscal deficit (GFD) target of 4.4 per cent of GDP.
It stated, "For FY27, monetary easing done so far must be complemented with fiscal support to enhance its effectiveness. Hence, while fiscal expansion is unlikely, we forecast the FM would refrain from further consolidation in FY27"
For FY27, the report noted that monetary easing undertaken so far needs to be complemented by fiscal support to improve its effectiveness. However, it added that a full-fledged fiscal expansion is unlikely.
Instead, Nuvama expects the Finance Minister to pause further consolidation and maintain the fiscal deficit at 4.4 per cent of GDP in FY27, the same level as FY26.
Fiscal consolidation is a government strategy to improve its financial health by reducing budget deficits and controlling public debt, achieved through a mix of increasing revenues (taxes) and cutting spending (subsidies, non-essential programs) to ensure long-term economic stability, maintain investor confidence, and promote sustainable growth
To push stronger growth, the report said the government may have to rely on large disinvestments or encourage public sector undertakings (PSUs) to step up capital expenditure, which has been slow for several years.
Beyond fiscal numbers, the Finance Minister may announce measures such as deregulation, credit-guarantee schemes and steps to improve ease of doing business to support growth. A credit guarantee scheme for microfinance institutions (MFIs) to help low-income borrowers may also be considered.
From a market perspective, Nuvama said higher development spending and capex are positive but may not be enough to stop the earnings downgrade cycle. It warned that margins are likely to see mean reversion and external headwinds remain a concern.
As a result, the report maintained a defensive bias, noting that tweaks in capital gains taxes could influence market sentiment in the near term.
The report added that while FY26 focused on boosting consumption through tax rationalisation, FY27 may focus on supporting investment through deregulation. Sectors likely to remain in focus include semiconductors, AI and robotics, and exports.
Overall, the FY27 budget is expected to be somewhat growth supportive, but the recovery is likely to remain modest, the report said.