The Central government may slow down the pace of fiscal consolidation in the upcoming financial year, as it believes the economy will require continued support amid external challenges, two senior officials told Moneycontrol.

Contents

Growth Outlook Tied to US Tariffs “Need to Support Growth”Fiscal Deficit Compression to Slow Debt-to-GDP Ratio on Track for FY31 Target Economist’s View on Growth Scenario

According to them, the Union Budget may set the fiscal deficit target for FY27 between 4.1 percent and 4.2 percent of GDP, which is 20–30 basis points lower than the current financial year’s target of 4.4 percent.

Officials indicated that a modest reduction in the fiscal deficit would strike a balance between growth support and long-term fiscal discipline.

Growth Outlook Tied to US Tariffs

One of the officials noted that India’s growth trajectory in FY27 may depend significantly on external developments.

He said that unless US tariffs are reduced to 25 percent or lower, India’s GDP growth in FY27 is unlikely to cross 6 percent. However, he added that the government is hopeful that a deal on tariffs will be reached in the coming weeks.

For the current financial year, the RBI has projected real GDP growth at 6.8 percent, which is 30 basis points higher than the 6.5 percent growth in FY25.

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“Need to Support Growth”

Officials emphasised that sustained government support will be crucial for economic momentum.

“Many factors are pulling down the economy… the government has to support growth going forward too, as it has been doing in the past three-to-four years,” one official said.

Although he did not disclose the exact capital expenditure (capex) number for FY27, he confirmed that it will not be lower than current levels.

For FY26, the Centre’s capex-to-GDP ratio is pegged at 3.1 percent, similar to FY25. The ratio was 3.2 percent in FY24.

Economists, during a pre-Budget meeting last week, also advised Finance Minister Nirmala Sitharaman to “keep pushing the pedal” on capex in FY27, even with slower fiscal consolidation.

On July 26, the Finance Minister had said that central government capex is a “primary driver of sustained economic growth” and will continue to remain a priority.

Fiscal Deficit Compression to Slow

Experts believe the pace of fiscal consolidation is likely to moderate.

Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership, said there is a clear inclination toward supporting growth, as seen in income tax cuts and GST rate reductions.

He noted that the pace of fiscal deficit compression will be reduced compared to recent years.

Historical data reflect strong consolidation so far:

FY25 fiscal deficit: 4.8% of GDP
FY24 fiscal deficit: 5.6%
FY23 fiscal deficit: 6.4%
FY22 fiscal deficit: 6.7%
FY21 fiscal deficit: 9.2%

Upadhyay added that it is unlikely the FY27 fiscal deficit will be materially lower, since further consolidation would require cutting capex—something he does not expect.

Debt-to-GDP Ratio on Track for FY31 Target

Officials also stated that setting FY27 fiscal deficit at 4.1–4.2 percent will keep the government on course to achieve its medium-term goal of a 50% debt-to-GDP ratio by FY31.

In FY25, the Centre’s debt-to-GDP ratio was 57.1 percent, expected to fall to 56.1 percent in FY26.

A second official noted that the government had aimed to reduce the fiscal deficit to 4.5 percent by FY26, and that this target will be achieved.

He added that since the long-term goal is now shifting to reducing debt-to-GDP to 50 percent by FY31, only modest fiscal deficit reduction is necessary going forward.

The government has not yet finalised its revenue and expenditure numbers for the upcoming Budget, which are expected to be completed by late December or early January.

Economist’s View on Growth Scenario

Dhiraj Nim, Economist at ANZ Research, said that in a normal year—with GDP growth at around 6.5 percent and CPI inflation near 4 percent—the government may not need significant fiscal consolidation to reach the 50 percent debt target by FY31.

He expects FY27 GDP growth to remain above 6 percent, provided US tariffs come down to 25 percent or below.

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