As India prepares to unveil the Union Budget for FY27 on February 1 amid heightened geopolitical and trade uncertainty, Goldman Sachs has distilled investor concerns into five core questions. The brokerage's budget preview highlights slower fiscal consolidation, tighter spending choices and sustained pressure on government borrowing even as growth remains resilient.

Fiscal Deficit Targets and Revenue Challenges

Goldman Sachs expects the government to meet the FY26 fiscal deficit target of 4.4% of GDP, but only through expenditure cuts. The brokerage projects a shortfall of about 0.5% of GDP in overall receipts, driven by weaker income tax and GST collections and lower-than-budgeted disinvestment proceeds.

The brokerage believes the shortfall in receipts will be met by expenditure cuts in current and capital expenditure to achieve the budgeted fiscal deficit target.

Medium-Term Consolidation Path

For FY27, Goldman Sachs expects the fiscal deficit to narrow to around 4.1% to 4.3% of GDP, with a baseline projection of 4.2%, down from 4.4% in FY26. However, the pace of consolidation is likely to be slower than in the previous two years as the government preserves flexibility to respond to external shocks.

The government is likely to lean towards the upper end of the range to retain space to support affected sectors if US trade uncertainty persists, particularly given subdued exports in tariff-exposed sectors such as textiles and gems and jewellery.

Spending Priorities and Capital Expenditure

Goldman Sachs expects capital expenditure growth to slow below nominal GDP growth, signalling that public capex has likely peaked as a share of GDP. The brokerage estimates capex at around 2.9% of GDP in FY27, with defence emerging as a clear priority within capital spending.

Key Spending Priorities:

• Defence spending: Expected to increase given national security priorities
• Railways spending: Likely to remain strong
• Roads and highways: Expected to moderate as a share of GDP
• Transfers to states: Likely to decline as a share of GDP

On current expenditure, Goldman Sachs noted limited scope for further cuts, with subsidies already budgeted at about 1.2% of GDP in FY26, representing a 10-year low.

Debt Reduction and Growth Dependency

India is likely to remain on track towards its medium-term goal of reducing central government debt to 50% of GDP by FY31, but this outcome hinges heavily on growth performance. Goldman Sachs estimates that a fiscal deficit of about 4.0% of GDP combined with nominal GDP growth of roughly 10.5% annually would move debt closer to the target.

The challenge will intensify in coming years as the government faces higher committed expenditure, including potential salary and pension increases following the formation of the 8th Pay Commission.

Government Bond Market Dynamics

Despite expectations of stronger domestic demand for government securities from banks, insurers and pension funds, Goldman Sachs expects the Reserve Bank of India to remain a net buyer in FY27. This is necessary to manage elevated borrowing and redemption pressures, with gross redemptions of about ₹5.50 trillion in central government bonds and ₹4.20 trillion in state bonds due in FY27.

The elevated redemption schedule will keep rollover risks and yield pressures high, with yields likely to remain under pressure given the substantial government bond redemption requirements. Goldman Sachs' analysis reflects the narrow path facing policymakers as they balance fiscal discipline, security-driven priorities, and heavy borrowing requirements amid global uncertainties.

Jefferies maintains conservative expectations for the upcoming FY27 Union Budget, projecting that Finance Minister Nirmala Sitharaman will prioritise fiscal consolidation while focusing on defence-led capital expenditure and targeted consumption support measures.

Fiscal Deficit and Consolidation Strategy

The brokerage expects the Centre to target a fiscal deficit of approximately 4.2% of GDP for FY27, representing a gradual consolidation pace of 15-20 basis points annually through FY31. An alternative scenario could see the government maintaining the deficit near 4.4% to support near-term growth, though this would likely pressure bond yields upward.

India's debt-GDP ratio remains above pre-Covid levels, with the government targeting a reduction of approximately 5 percentage points by FY31. Tax revenue growth is projected at around 8% for FY27, marking the third consecutive year of sub-10% growth. A significant fiscal support mechanism will be the RBI dividend transfer, which Jefferies estimates could increase 10-15% to about ₹3.00 trillion, supported by rupee depreciation.

Capital Expenditure Focus on Defence

Jefferies projects overall government capital spending to grow approximately 12% in FY27, reaching ₹12.50 trillion. However, the expenditure composition will shift significantly towards defence priorities, with defence capex expected to grow at a substantially higher rate of 25%.

With year-to-date FY26 defence capex already up 57%, the brokerage anticipates non-defence capex growth moderating to the 5-10% range. Jefferies projects central government defence capital expenditure to approach 1% of GDP by FY31, a level last observed four to five years after the Kargil conflict.

Pay Commission and Market Taxation Considerations

The pending 8th Central Pay Commission represents a significant fiscal risk factor. The decadal government salary adjustment exceeding ₹7.00 trillion was scheduled for January 2026 but has been delayed. Given upcoming state elections in Uttar Pradesh scheduled for March 2027, Jefferies believes the government may allocate most pay increases in the upcoming Budget, with arrears distributed into the next fiscal year.

Regarding capital market taxation, Jefferies notes potential changes but excludes them from base case projections. Possible capital gains tax relief for select Foreign Portfolio Investor categories could benefit equities, while tax incentives to boost debt market and bank deposit inflows might negatively impact equity markets.

Sector-Specific Expectations and Key Measures

Jefferies identifies the FY27 Budget as a stock-specific catalyst across multiple sectors including financials, capital goods, defence, renewables, real estate, travel, and building materials. The brokerage expects continued high allocations supporting cement demand through roads, railways, metros, and housing projects, with 10-12% of demand from low-cost housing and 23-25% from infrastructure.

The analysis highlights eight critical measures to monitor:

• Banking Sector: Deposit growth incentives through tax benefits
• Insurance: Increased tax-relief investment limits for traditional life insurance plans and ULIPs
• Defence: Strong capex growth exceeding 20% benefiting PSUs and contractors
• Electronics: Mobile PLI scheme allocations as FY26 expiry approaches
• Solar Energy: Enhanced PM Kusum scheme funding potentially rising from ₹26.00 billion to ₹100.00 billion
• Consumer Sectors: Pay commission-linked income boosts for middle-class segments
• Real Estate: Affordable housing support through expanded CLSS interest subsidies
• Technology Infrastructure: Policy support for Data Centers and Global Capability Centers

Jefferies emphasises that 10-year G-Sec yields have remained broadly stable despite a 125 basis points repo rate reduction, highlighting structural demand challenges in the bond market. The brokerage maintains that tobacco remains a key monitoring sector following recent excise and GST modifications, with potential National Calamity Contingent Duty adjustments on cigarettes representing a risk factor for companies like ITC.