Click here to read the full report

The FY27 Budget aligned fiscal discipline with strategic priorities. Allocations have been increased for infrastructure, alongside measures to strengthen domestic capabilities across both key labour-intensive and emerging sectors. Banking sector development remains a priority to foster inclusive growth and is complemented by enhanced financing support for MSMEs. Service sector activity is expected to benefit from targeted interventions, including support for cloud services through data centres, promotion of medical value tourism, continuation of safe harbour provisions, and exemptions on global income for non-resident experts. On the tax front, constructive measures, particularly customs duty exemptions, are aimed at reducing production costs and boost competitiveness. Overall, the Budget preserves macroeconomic stability and maintains continuity in policy. Fiscal consolidation will continue, with the centre’s debt-to-GDP ratio projected to decline by around 0.5% and the fiscal deficit expected to narrow to 4.3% of GDP. The effective revenue and primary deficits stand to consolidate further.

We assess the Budget through four key questions.

Was the FY26 deficit target met?

Fiscal math for the outgoing year FY26 was largely along expectations, with the centre retaining its fiscal deficit target at -4.4% of GDP. Nominal GDP was along the first advance estimate at 8% and as we had discussed in our preview India’s Budget to align with strategic objectives, this does not influence the deficit computation.

What does the FY27 fiscal math rest on and what will be the market impact?

Moving to the debt-targeting framework, the centre reiterated its plans to reach a target of debt-to-GDP ratio of 50±1% by 2030. The debt-to-GDP ratio is estimated to be 55.6% of GDP in FY27, compared to 56.1% 2025-26 (RE). Our read is that the pace of reduction is not aggressive, keeping in mind the need to spur growth. The accompanying fiscal deficit target is estimated at -4.3% of GDP, along our projection, which implies a narrower 0.1% consolidation in the year ahead. How does one arrive at that math? The breakdown of ratios show that the allocation towards capex is expected to increase marginally, while all other ratios have been assumed at conservative levels (see chart).

• Market impact

The budget carried little to boost the bond markets, with yields likely to harden in the near-term. The central bank has been amongst the bigger buyers of GSecs in the past year and this is likely to continue until the domestic players, led by banks make a comeback to better balance the supply-demand mix.

What was the main push of the FY27 Budget measures?

Measures signaled a play on the medium to long-run, by strengthening domestic capabilities in the face of a challenging global environment. Key changes included (full list is here):

• Boosting domestic manufacturing capabilities and service sector focus

In a bid to boost the domestic manufacturing capabilities across traditional and new economy sectors, key changes will be made for: a) Semiconductors & Electronics, with allocation towards the electronics components manufacturing scheme raised to INR 400bn to deepen local value addition across electronics industries and launch of India Semiconductor Mission; b) Biopharma, with plans to build India into a global biopharma hub, backed by INR 100bn allocation over five years; c) Textiles; d) Critical Inputs & Raw Materials, with dedicated rare earth mineral corridors announced in multiple states (e.g., Odisha, Andhra, Tamil Nadu, Kerala) to boost domestic mining, processing and supply of critical minerals used in advanced manufacturing; e) Chemical Parks & Legacy Industry Revival; f) MSMEs push through financing support, additional equity through the Self-Reliant India Fund to scale small and medium enterprises, amongst others.

Measures also included customs duty rationalization and deferred duty payments for trusted manufacturers, besides duty-free import provisions for sectors like seafood, footwear and textiles to make Indian exports more competitive.

Towards the service sector, key announcements included: a) tax holiday has introduced until 2047 for foreign cloud providers using Indian data centres (with conditions requiring service to domestic customers via Indian resellers); b) software, IT-enabled services, KPO and contract R&D grouped will be brought under a single IT services category for simpler taxation. At the same time safe harbour eligibility limits were raised significantly to boost compliance ease and reduce disputes for service providers; c) boost Orange Economy, which involves creative & digital services.

• Taxation

The new Income-tax Act, 2025 will be effective from April 2026 (FY27). There was notable change in Tax-Collection at Source (TCS) & Deductions Changes, for instance, the rates on outward remittances will be reduced for specific purposes, including education and medical treatment. On the markets front, the transaction taxes on equity derivatives were increased to curb speculative trading, which involved raising the STT on futures from 0.02% to 0.05% and options STT from 0.10 % to 0.15 % and other changes on tax on share buybacks. These changes triggered kneejerk weakness in the equity markets.

Will the Budget materially alter the monetary policy path, going forward?

With the government remaining on course its fiscal consolidation path, we don’t expect any material impact on the direction of monetary policy. The RBI monetary policy committee will decide on rates on 6-February. The MPC lowered rates in December 2025, along our expectations, but is expected to refrain from cutting rates further in February.

Click here to read the full report