India's fiscal policy landscape is poised for a fundamental transformation as the country prepares for its FY27 Union Budget on February 1st, 2026. The government is transitioning from a traditional fiscal deficit target approach to a debt-anchored framework, marking a significant shift in how fiscal consolidation will be managed going forward.

New Debt Framework Takes Center Stage

Under the new framework, the central government's debt ratio is expected to be set near 55.10% of GDP in FY27, forming part of a structured glidepath toward achieving 50% by FY31. This transition fundamentally changes market monitoring priorities, with the primary deficit becoming the key metric rather than the traditional fiscal deficit measure.

The framework allows for more gradual fiscal consolidation, as a primary deficit lower than 1% of GDP should be sufficient to meet medium-term debt targets, assuming nominal GDP growth improves and interest rates stabilize.

FY26 Performance and Revenue Challenges

Despite facing headwinds, the government appears positioned to meet its FY26 fiscal deficit target of 4.4% of GDP. This achievement comes despite significant challenges, including weaker than expected tax revenues and a substantial revenue shortfall.

The government has managed these challenges through higher than usual RBI dividends and tighter spending control, particularly on revenue expenditure. Economic recovery has been supported by income tax relief and GST rationalization, though global tariff tensions continue to impact export-oriented sectors.

FY27 Budget Projections and Market Implications

The FY27 Budget is likely to target a fiscal deficit of around 4.3% of GDP, aligning with the new debt framework principles. Market borrowing will be the most closely monitored element, with significant implications for fixed income markets.

The government is expected to reduce reliance on long tenor bonds due to tepid investor appetite and elevated long-term yields, concentrating supply in the belly of the curve instead.

RBI's Critical Role in Bond Management

The Reserve Bank of India's role remains pivotal in smoothing the borrowing cycle. The central bank holds approximately Rs 1 lakh crore worth of bonds maturing in FY27, and the approach to managing these maturities will significantly influence market liquidity conditions.

Whether these bonds are refinanced through switches or absorbed via secondary market operations will be crucial for maintaining balanced demand-supply dynamics in the fixed income market.

Market Outlook and Investment Implications

The government's continued focus on capital expenditure, subsidy rationalization, and structural reforms strengthens prospects for sustainable growth, potentially benefiting both the Indian rupee and capital markets. For fixed income investors, a market-friendly budget featuring lower gross borrowing, clarity on the debt glidepath, efficient switch operations, and restrained long-end issuance would be positive developments.

State finances face tightening constraints, making the scale of State Development Loan issuance in FY27 a critical factor to monitor. The use of Open Market Operations for bond purchases as a primary source of durable liquidity should help maintain balanced market conditions.

Global uncertainty has displaced domestic inflation as the primary concern among economists ahead of the FY27 Budget, according to a comprehensive poll of 20 economists. This shift reflects growing apprehension about external factors that could impact India's economic trajectory, marking a significant change in priorities from previous budget cycles.

Primary Economic Concerns

The poll results reveal a clear hierarchy of concerns among economists:

Yuvika Singhal, economist at QuantEco Research, highlighted specific risks: "No trade deal with the US could impact labour-intensive sectors leading to unemployed workers." This sentiment reflects broader concerns about trade relationships and their potential impact on employment-intensive industries.

Investment Dynamics and Fiscal Projections

Private investment concerns have gained prominence as public capex growth shows signs of moderation. The poll indicates that capex is expected to rise to Rs 12 lakh crore, though this would represent 3.05 percent of GDP compared with 3.14 percent in the previous fiscal.

Abhishek Upadhyay of ICICI Securities expressed cautious optimism while noting structural challenges: "Even as growth is fine, it's not clear this will be a self-sustaining recovery given global risks and role of one off domestic tailwinds in FY26."

Dipti Deshpande, economist at Crisil, emphasized the transition challenge: "A quicker pick-up in private corporate investment given that govt capex will need to start moderating to meet fiscal consolidation objectives."

Growth Projections and Policy Expectations

Economists forecast nominal growth to hit 10.1 percent of GDP in the coming fiscal, suggesting underlying economic resilience despite external headwinds. The poll reveals strong expectations for continued government support in key sectors:

Sectoral Support and Export Competitiveness

The survey indicates widespread expectation for targeted sectoral interventions. Deshpande outlined specific areas where support is anticipated: "Measures that help improve export competitiveness - especially through lower power and logistics costs and further easing of regulatory constraints."

Particular attention is expected for MSMEs, given their significant role in export-intensive sectors. "Given that significant role of MSMEs in export-intensive sectors such as textiles, leather, and plastics which have been disproportionately affected, the budget could be expected to announce more targeted support to the MSME segment," Deshpande added.

Shifting Risk Landscape

The poll results demonstrate a notable shift in economist priorities, with traditional concerns like inflation, exchange rates, and credit conditions receiving relatively fewer mentions. This suggests that while domestic macro conditions are viewed as relatively stable, external factors have become the predominant source of uncertainty for India's economic outlook.