The government is expected to prioritise medium-term debt consolidation while continuing a strong push for capital expenditure in the Union Budget for 2026-27, according to pre-Budget expectations outlined by rating agency ICRA.ICRA said the upcoming Budget assumes added significance as it will be the first to align with the recommendations of the 16th Finance Commission, which will decide fiscal transfers between the Centre and the states for the next five years. The agency expects the Centre’s fiscal deficit to be capped at around 4.3 per cent of GDP in 2026-27, slightly lower than the 4.4 per cent budgeted for 2025-26, supported by an estimated 9.8 per cent growth in nominal GDP.On this trajectory, the Centre’s debt-to-GDP ratio is projected to ease from 56.1 per cent in 2025-26 to about 55.1 per cent in 2026-27, in line with the medium-term consolidation path. However, in absolute terms, the fiscal deficit is expected to rise to Rs 16.9 trillion in 2026-27 from Rs 15.7 trillion in 2025-26, mainly due to higher capital expenditure.ICRA said the government is likely to front-load infrastructure spending before fiscal rigidities increase from 2027-28 onwards, when the implementation of the 8th Central Pay Commission is expected to raise salary and pension liabilities. “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,” the agency said.Capital expenditure is projected to rise to Rs 13.1 trillion, or 3.3 per cent of GDP, from an estimated Rs 11.5 trillion in 2025-26, supporting investment activity and improving the quality of government spending.On the revenue side, gross tax revenues are expected to grow by around 7 per cent in 2026-27, led by an 11 per cent rise in direct taxes, while indirect tax growth may remain muted at about 2 per cent following GST rate cuts from September 2025. After devolution to states, net tax revenues are projected to increase by 5.2 per cent to Rs 28.5 trillion.Revenue expenditure growth is expected to stay contained at around 4 per cent, helping the revenue deficit narrow to Rs 4.7 trillion, or 1.2 per cent of GDP, the lowest in nearly two decades. At the same time, gross market borrowings are projected to rise by 15–16 per cent to Rs 16.9 trillion in 2026-27 due to higher capital spending and increased debt redemptions.The Union Budget for 2026-27 is scheduled to be presented in Parliament on February 1, 2026.
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