Budget may project 20% capex growth, 4.4% fiscal deficit: EY report

The FY26 Budget may project a 20 per cent increase in capex spending to drive economic activity, leave more disposable income in the hands of people and target a fiscal deficit of 4.4 per cent of GDP for the fiscal ending March 2026, a EY report said on Thursday.

EY India Chief Policy Advisor DK Srivastava said amid continuing global uncertainties, India may have to rely largely on domestic demand drivers to support the growth momentum. 

 

"The FY26 budget should therefore restore the momentum of growth in GoI's capital expenditure. This may be supplemented by some rate rationalisation and income tax deductions aimed at increasing personal disposable incomes, particularly in the hands of lower income and lower middle-income groups," he said.

The upcoming budget must balance fiscal prudence with growth-oriented measures.

Increasing capital expenditure and putting more disposable income in the hands of consumers, particularly urban consumers, will be pivotal to uplifting growth in domestic demand," Srivastava said.

The EY Economy Watch January 2025 report anticipates that the government may continue on its fiscal deficit glide path, reducing the fiscal deficit for FY26 to 4.4 per cent of GDP. The government had budgeted a 4.9 per cent deficit for the current fiscal and EY expects this number to come in at 4.8 per cent in revised estimates in the 2025-26 Budget to be presented on February 1.

This can be enabled by accelerating domestic demand and private consumption, as well as by increasing the government's capital spending by at least 20 per cent. This shall pave the way for sustained economic growth while ensuring fiscal discipline, EY said.

For the current fiscal, the government had budgeted a capex of Rs 11.11 trillion. However, Lok Sabha elections in 2024 had slowed capex momentum in April-July, leading to a shortfall in targeted capex spend.

Srivastava, who is a member of the advisory council to the 16th Finance Commission, also said that the key to India's medium-term growth lies in undertaking strategic reforms and their timely execution, ensuring a resilient path toward achieving long-term economic goals.

"While there may be challenges, such as global economic headwinds and pressure on the INR, these measures can help India sustain its growth trajectory. With the right fiscal policy initiatives and reforms, India can continue progressing toward its long-term targets," he said.

With an average annual nominal GDP growth of 10.5 per cent, and even assuming a relatively higher annual depreciation rate of the INR/USD at close to 3.5 per cent, India would still achieve the USD 5 trillion economy milestone by FY30, Srivastava added.

On the inflation front, CPI inflation showed moderation in December 2024 at 5.2 per cent. With core CPI inflation also remaining steady at a relatively lower level of 3.7 per cent, there is a possibility of a downward revision in policy rates in FY26 by 50 basis points, which could boost private investment, EY said.