India is at a critical economic crossroads ahead of Union Budget announcement on February1. HSBC expects nominal GDP to grow and fiscal deficit to narrow on the back of tailwinds.
Here is a detailed analysis of what HSBC expects from the upcoming Budget when it says it believes “the government will focus on two pillars during such time – restraint and reforms.”
HSBC expects nominal GDP growth to rise to 10% in FY27
Nominal GDP growth in India, which has been extremely weak at 8% in 1HFY26 compared with around 12% in the three years immediately after the pandemic, is likely to pick up in FY27.
The brokerage expects nominal GDP growth of around 10% in FY27, largely supported by the normalisation of wholesale price inflation.
HSBC noted that the improvement will support corporate earnings, tax collections and fiscal consolidation.
Inflation, however, is expected to stay low, allowing the RBI to remain growth supportive and cut rates again if growth weakens.
HSBC expects fiscal deficit to narrow to 4.2% of GDP in FY27
The brokerage expects the Centre to meet its FY26 fiscal deficit target of 4.4% of GDP despite weak tax collections, helped by higher non-tax revenues and lower current expenditure.
“Helped by elevated non-tax revenue, the government will likely meet its FY26 fiscal deficit target of 4.4% of GDP,” HSBC said.
For FY27, HSBC forecasts a further consolidation, with the fiscal deficit narrowing to 4.2% of GDP.
“With some pruning of expenses, we forecast a fiscal deficit of 4.2% of GDP in FY27, on path to meeting the central government’s FY31 public debt target,” the report said.
Roads, railways, defence drive FY26 capex
The report noted that capital expenditure has been frontloaded in FY26, with strong spending on roads, railways and defence. While capex is likely to meet budget estimates, HSBC expects a pause in spending in the March quarter to manage the fiscal math.
For FY27, capital expenditure is expected to remain steady as a percentage of GDP, rising in absolute terms to around Rs 12.3 trillion. The Centre may also increase interest-free capex loans to states to support long-term infrastructure projects.
HSBC sees FY27 net market borrowing steady at Rs 11.5 trillion
HSBC expects net market borrowing to remain unchanged at Rs 11.5 trillion in FY27. However, higher repayments could push gross market borrowing to around Rs 16 trillion.
Despite this, the brokerage believes borrowing will remain manageable as the growth in borrowing is expected to stay below nominal GDP growth.
Reforms likely to take centre stage
HSBC said reforms are likely to feature prominently in the budget speech, both on the domestic and external fronts.
On the domestic side, the government may push ahead with deregulation at the Centre and state levels, rationalise centrally sponsored schemes, and explore further subsidy reforms. The report also flagged possible incentives for mid-tech manufacturing and small firms.
On the external front, HSBC expects the government to rationalise customs duties, withdraw non-tariff barriers such as quality control orders, and open more sectors to foreign direct investment.
“A slew of reform steps and a neutral fiscal impulse are likely to be the hallmark of the budget season,” the report said.
RBI, PSU dividends to offset tax revenue shortfall in FY26: HSBC
HSBC said the shortfall in tax revenues in FY26 will be partly offset by strong dividends from the Reserve Bank of India and public sector undertakings. The RBI alone has transferred a dividend of around Rs 2.7 trillion to the government for FY26.
Lower spending on current expenditure, including savings on interest costs and non-subsidy expenses, is also expected to support the fiscal position.
Economy at a crossroads
HSBC described the current economic signals as mixed, with strong real GDP growth and improving credit trends on one hand, and weak nominal GDP growth and private investment on the other.
The brokerage said India stands at an important crossroads, where policy support, reforms and rules-based fiscal management will be key to sustaining growth in FY27 and beyond