Budget 2026–27: Govt may ease fiscal stance

New Delhi: The government will likely refrain from aggressive fiscal consolidation in the coming budget, instead retaining the necessary firepower to cushion the economy amid external headwinds, especially higher US tariffs, said senior executives handling sovereign ratings at top global agencies such as S&P, Moody’s and Fitch.Reforms — especially on deregulation and budgetary measures to lift revenue buoyancy — would be rating-positive, while any deviation from the recent years’ fiscal consolidation path that can potentially weaken fiscal metrics could be rating-negative, some of these executives told ET. “On the budget for 2026-27, our base case is for gradual fiscal consolidation,” said YeeFarn Phua, director, sovereign & international public finance ratings for Asia at S&P.Christian de Guzman, senior vice-president at Moody's Ratings, said the not-so-significant fiscal consolidation in FY27 partly reflects the “perceived need to continue to support the economy amid the ongoing uncertainties surrounding external demand… and despite the very strong real GDP growth outcomes in recent quarters.” 127570406 Echoing the sentiment, Jeremy Zook, director, APAC sovereign ratings, Fitch, said he expects the government to set a fiscal deficit target of 4.2% of GDP in the budget, compared to 4.4% for this fiscal year. The Centre had expressed confidence of containing its fiscal deficit at 4.4% of GDP in FY26, having cut it sharply from 9.2% in the pandemic year of FY21, and beating its initial target of containing the financial gap at 4.5% by FY26. The Centre’s debt level is estimated to ease to 56.1% of GDP this fiscal, from 58.8% in FY22. Zook expects the Centre to further adjust expenditure to continue narrowing fiscal deficit. “Some of this adjustment is likely to come from the capex side,” he said.Subdued Nominal Growth“We think public capex has peaked and is likely to decline slightly from here,” said Zook of Fitch. Guzman at Moody’s highlighted the recent trend of subdued nominal growth even as real economic expansion remains strong. Achieving significant gains in lowering the debt ratio, pegged to the nominal GDP, will require faster expansion, he reckoned.While the statistics ministry has estimated real growth this fiscal at 7.4%, the nominal expansion is pegged at a five-year low of 8%, thanks to subdued price pressure in the economy. Zook said if nominal growth does not return to above 10% in the coming years, reducing the government’s debt-to-GDP ratio would become more difficult.S&P last year raised its sovereign rating on India for the first time in 18 years to ‘BBB’ from the lowest investment grade of ‘BBB-’, citing the country’s resilience and sustained fiscal consolidation. However, Moody’s and Fitch have retained their ratings on the country at the lowest investment grade since 2020 and 2006, respectively. All three maintained a ‘stable’ outlook. Growth, Reforms, TariffThe executives expect India to remain the world’s fastest-growing major economy at least this fiscal and the next. S&P’s Phua forecast GDP growth at 6.5% and 6.7%, respectively, in FY26 and FY27, “driven by strong consumption, despite the impact of US tariffs.”Guzman pegged the economic expansion rates for this fiscal and the next at 7.3% and 6.4%, respectively while Zook projected 7.4% and 6.4%. Zook reckoned the government could unveil fresh reform measures in the Budget. “We anticipate that more concrete measures to advance deregulation could be forthcoming,” he said. On US tariffs, Phua said a trade deal with Washington will reduce uncertainty and boost confidence, driving India’s labour-intensive sectors. Guzman expects the impact of the US tariffs to be tempered by notable exceptions for several of India’s key exports—particularly pharmaceutical and electronic goods — and by New Delhi’s ongoing diversification and expansion of trade relationships.According to Zook, the Indian economy has largely shrugged off the tariffs so far, but over the medium term, “we see US tariffs as a potential headwind.” First, the tariffs give uncertainty to businesses and weigh on sentiments, which could constrain a pick-up in the private capex cycle, he said. Second, sustained tariffs at high levels, especially when regional peers have negotiated lower duties, limit India’s attractiveness as a foreign direct investment destination at a time when multinationals are looking to diversify their supply chains, he said.