Budget should push capital expenditure materially: Aditi Nayar, ICRA

The presentation of the Union Budget for FY2027 is around the corner, and expectations are rife around the policy choices that the Government of India (GoI) will make. While the common ask is typically centred around tax relief, ICRA firmly believes that the Budget should push capital expenditure materially in the next fiscal, to support investment activity and help it to broad-base.

 

The GoI had already provided relief on the personal income tax front in the Union Budget for FY2026, with the revenue foregone on account of this pegged at ₹1.0 trillion. Subsequently, it cut GST rates across a large number of items, effective September 22, 2025. This led to a fall in prices, which was visible in the sequential trends in the consumer price index (CPI) in October-November 2025. While the revenue implications on account of goods and services tax (GST) rationalisation were pegged at just ₹0.5 trillion, we estimate the gain to the consumer at a much larger ₹2.0 trillion, with the cessation of the GST compensation cess. Overall, these direct and indirect tax measures are estimated to have provided sizeable support to consumers to the tune of ₹3 trillion, helping to buffer domestic consumption in an era of ever-growing global uncertainty.

 

An upcoming change that will affect the Centre and the states’ fiscal math is the recommendation of the 16 th Finance Commission, for the period from FY2027 to FY2031. While the report has been submitted, its recommendations would only become public around the time of the Budget. We have presumed the current resource-sharing framework in our Budgetary forecasts for FY2027, which may well turn out to be different. The 16 th FC’s recommendations will influence the fiscal space available for both the Centre and the states, and may nudge them to reassess their spending priorities.

 

Fiscal rigidities in the form of a sharp increase in committed expenditure burden would set in FY2028 on account of the implementation of the 8th Central Pay Commission (CPC), which would entail a revision in salaries and pensions of the GoI’s employees and pensioners. The 8th CPC was supposed to be implemented from January 1, 2026, implying a buildup of arrears until the actual payout in FY2028, which would put additional pressure on the Union Budget for that fiscal. This would limit the room for an expansion in discretionary expenditure, including capex in FY2028. For instance, following the 6th CPC, which had large arrears (with the payouts distributed across two installments), the GoI’s salary expenditure surged by 60 per cent year-on-year (Y-o-Y) in FY2009 and 31 per cent in FY2010. With limited arrears on account of the

7th CPC, the GoI’s salary burden had risen by 20 per cent in FY2017.

 

Consequently, we expect the GoI to pencil in a double-digit expansion in its capex to ₹13.1 trillion in FY2027. Within capex, we expect a substantial increase in the outlay for the 50-year interest-free capex loan scheme to State Governments, which was pegged at Rs. 1.5 trillion in FY2026 BE. This would supplement private capex activity, which has not been broad-based, amid heightened global uncertainty and the weakness in merchandise exports over the last few years.

 

Bolstering capex would result in a further improvement in the quality of the GoI’s expenditure, with such spending amounting to 24.5 per cent of total expenditure in FY2027, up from 22.9 per cent in FY2026 (as per ICRA’s estimates) and 22.6 per cent in FY2025 PA. We estimate the capex-to-GDP ratio to inch up further to 3.3 per cent in FY2027 from 3.2 per cent estimated in FY2026.

 

The FY2027 Union Budget would also need to accommodate the shift in the fiscal anchor to the debt-to-GDP ratio, which was announced in FY2026. The medium-term target for the debt-to GDP ratio was set at 50 per cent+/-1 per cent by FY2031, which would entail a modest average annual consolidation from the current levels of 56.1 per cent as per the FY2026 BE. Based on these assumptions, we implicitly expect the GoI to peg the fiscal deficit at 4.3 per cent of GDP in FY2027, marginally lower than the 4.4 per cent estimated for FY2026.

 

This assessment assumes a smooth glide path for the debt trajectory through FY2031, which cannot be taken as a given, particularly with the likely one-off sizeable spending requirements owing to the 8th CPC, as discussed previously. However, any volatility on this account is only likely to be adjusted in the ensuing years, rather than in FY2027 itself. Besides, with the new GDP series (base year 2022-23) due at end-February 2026, the debt-to-GDP ratios could change somewhat, requiring a recalibration of the debt-to-GDP glide path. For instance, a gentler consolidation would be warranted if the size of the nominal GDP as per the new series is larger than that in the old (2011-12) series.

 

(Disclaimer: This article is by Aditi Nayar, chief economist, head of research & outreach, ICRA. Views expressed are her own.)