New Delhi [India], January 18 : The government is likely to prioritise medium-term debt consolidation while sustaining a strong push for capital expenditure in the upcoming Union Budget for 2026-27, according to pre-Budget expectations outlined by rating agency ICRA.
The upcoming budget assumes significance, as it will be the first to align with the recommendations of the 16th Finance Commission, which will determine fiscal transfers between the Centre and states for the next five years, the rating agency has asserted.
ICRA expects the Centre's fiscal deficit to be capped at around 4.3 per cent of GDP in 2026-27, marginally 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 per cent in 2025-26 to about 55.1 per cent in 2026-27, consistent with the medium-term consolidation path.
Despite the marginal improvement in the deficit ratio, the absolute fiscal deficit is projected to rise to Rs 16.9 trillion in 2026-27, compared with Rs 15.7 trillion in 2025-26.
This increase is expected to be driven largely by higher capital expenditure, as the government seeks to front-load infrastructure spending before fiscal rigidities intensify from 2027-28 onwards due to the anticipated implementation of the 8th Central Pay Commission, which will raise salary and pension liabilities, it said.
"We believe that the GoI will push up capital expenditure by ~14% (to Rs. 13.1 trillion), before fiscal rigidities in the form of higher committed expenditure set in from FY2028 on account of the 8th Central Pay Commission (CPC) recommendations on salary/pension revisions for Central Government employees/pensioners," ICRA said.
ICRA projects that capital expenditure will be increased by around 14 per cent to Rs 13.1 trillion in 2026-27, equivalent to 3.3 per cent of GDP, up from an estimated Rs 11.5 trillion in 2025-26.
This continued emphasis on capex is expected to support investment activity and improve the quality of government spending.
On the revenue front, gross tax revenues are projected to grow by around 7 per cent in 2026-27, led by a robust 11 per cent expansion in direct tax collections.
In contrast, indirect tax growth is expected to remain muted at about 2 per cent, reflecting the impact of GST rate cuts introduced from September 2025.
After accounting for central tax devolution to states, estimated at Rs 15.4 trillion, the Centre's net tax revenues are projected to grow by a modest 5.2 per cent to Rs 28.5 trillion in 2026-27.
Non-tax revenues are expected to rise by about 5 per cent, although the record Rs 2.7 trillion dividend transfer from the Reserve Bank of India in 2025-26 is likely to moderate in the coming year.
Revenue expenditure growth is expected to remain contained at around 4 per cent in 2026-27, supported by slower growth in interest payments and subsidies. As a result, the revenue deficit is projected to narrow to Rs 4.7 trillion, or 1.2 per cent of GDP, marking the lowest ratio in nearly two decades.
However, higher capital spending and a sharp rise in debt redemptions are likely to push up borrowing requirements. Gross market borrowings are projected to rise by 15-16 per cent to Rs 16.9 trillion in 2026-27.
As has been the convention, the Union Budget for 2026-27 will be presented in the Parliament on February 1, 2026.