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.

India's FY27 Union Budget is likely to hinge on five quiet but consequential policy choices that could steer both equity and bond markets in the year ahead, according to Kotak Securities. In a volatile global backdrop marked by geopolitical tensions and trade uncertainty, the brokerage expects the government to prioritise stability over spectacle, slowing the pace of fiscal consolidation, sustaining capital expenditure, and leaning on buoyant non-tax revenues.

Fiscal Consolidation Takes Measured Approach

Kotak Securities projects a deliberate easing in the fiscal consolidation path, with the Centre's gross fiscal deficit expected at 4.3% of GDP in FY27, only marginally lower than the estimated 4.4% in FY26. The brokerage noted that the Centre's debt-to-GDP target of 50±1% by FY31 allows room for a modest annual reduction of 10-20 basis points in the fiscal deficit ratio.

"India's current economic backdrop, shaped by geopolitical tensions and trade uncertainty, warrants a steady, growth-supportive stance in the FY27 Union Budget," the brokerage stated.

Limited Scope for Major Fiscal Stimulus

Following income tax relief and GST rate cuts in FY26, Kotak sees little headroom for large, market-pleasing giveaways. The analysis indicates that committed expenditure accounts for around 60% of revenue expenditure, meaning outright populism would risk straining the fiscal balance. This constraint comes even as several states have pivoted toward cash-transfer schemes.

Capital Expenditure Remains Priority Focus

The third key decision involves maintaining firm focus on capital expenditure, with Kotak projecting capital spending growth of 9% in FY27. The expenditure breakdown shows a sharp emphasis on defence spending, expected to rise 20%, along with continued support through loans for states' capex programmes.

Revenue expenditure is projected to grow at a more restrained 5%, underscoring the Centre's preference for growth-supportive investment over consumption-led stimulus.

Revenue Projections Show Steady Growth

On the revenue side, Kotak forecasts gross tax revenue growth of 9% in FY27, supported by robust performance across multiple categories. The projections are underpinned by 10-10.5% nominal GDP growth, stronger corporate earnings, and moderate wage gains.

Indirect taxes are expected to benefit from strong GST and excise collections, particularly reflecting higher taxes on tobacco. A crucial cushion comes from non-tax revenues, with the RBI's surplus transfer estimated at ₹2.9 trillion in FY27, up from ₹2.7 trillion in FY26, citing continued strength in foreign and domestic income.

Higher Borrowing Could Pressure Bond Markets

The fifth decision involves higher borrowing levels that could unsettle bond markets. Kotak estimates gross government securities borrowing at ₹16.00 trillion in FY27, compared with ₹14.80 trillion in FY26, driven by large redemptions.

The brokerage warned that this increased borrowing could "add pressure across the yield curve," potentially creating challenges for bond market participants.

Taken together, Kotak's analysis presents a Budget that is deliberately understated, seeking to balance growth support with fiscal credibility. For markets, the signals may be subtle rather than dramatic, but the brokerage argues they could still prove decisive in shaping sentiment through FY27.