Rating agency ICRA has projected gross tax revenues to grow by around 7% in FY27, led by a robust 11% expansion in direct taxes.
This will provide critical support for fiscal consolidation, despite muted growth in indirect taxes following GST rate cuts implemented from September 2025.
Against this backdrop, ICRA expects the fiscal deficit to be capped at 4.3% of GDP in FY2027, marginally lower than the Budget Estimate of 4.4% in FY2026, assuming nominal GDP growth of 9.8%.
The FY2027 Budget is likely to signal a structural shift toward a medium-term debt reduction path, aligned with the forthcoming recommendations of the 16th Finance Commission, it said in a pre-Budget note.
Debt Consolidation Path
Central government debt is estimated to decline to 55.1% of GDP in FY2027 from 56.1% in FY2026. Achieving the medium-term target of 50% (±1%) by FY2031 would require an average reduction of about one percentage point per year, implying a steady fiscal deficit of around 4.3% of GDP over FY2027–FY2031.
On the expenditure side, capital expenditure is expected to rise by around 14% to Rs. 13.1 lakh crore in FY2027, equivalent to 3.3% of GDP. This acceleration is likely to occur before fiscal rigidities increase from FY2028 onward, driven by higher salary and pension commitments following the 8th Central Pay Commission.
Revenue Expenditure Outlook
In contrast, revenue expenditure growth is expected to remain modest at around 4%, aided by slower growth in interest payments and a moderation in subsidy outgo.
Consequently, the revenue deficit is projected to decline to Rs. 4.7 lakh crore, or 1.2% of GDP, in FY2027.
On the financing front, gross market borrowings are expected to rise to Rs. 16.9 lakh crore, largely reflecting higher redemptions, while net market issuances may increase to Rs. 12.2 lakh crore.
Overall, supported by stable growth assumptions and improving revenue quality, FY2027 is expected to mark a calibrated step toward fiscal and debt consolidation, it added