Budget 2026: SBI Research sees fiscal deficit at 4.2% amid global risks

SBI Research expects Budget 2026 to focus on fiscal discipline, managing rising debt, steady borrowing and higher capital spending amid global uncertainty and volatile markets

The Union Budget for 2026-27 will be presented at a time when the global economy is facing deep uncertainty, rising geopolitical tensions, volatile financial markets and climbing commodity prices, according to a new report by SBI Research. Despite these global challenges, India continues to stand out as a stable and resilient economy.

 

The SBI research report on 'Prelude to Union Budget 2026-27' notes that the world economy is going through a phase of fragmentation, with trust between major economies weakening. Financial markets remain fragile, equities and bond markets are under pressure, while commodity prices are rising. There are also concerns that crude oil prices could rise sharply if global supply conditions change.

 

 

Against this backdrop, India is described as an “ocean of certainty” in a turbulent global environment. The report highlights that India’s recovery after the Covid-19 pandemic has been stronger than its recovery after the 2008 global financial crisis and better than many peer economies, including high-income countries.

 

Fiscal deficit likely at 4.2% of GDP in FY27

 

SBI Research expects the fiscal deficit for FY27 to be budgeted at around 4.2 per cent of gross domestic product (GDP), continuing the government’s path of fiscal consolidation. Nominal GDP growth for budget calculations is projected at 10.5-11  per cent, although higher global commodity prices could push up wholesale inflation.

 

The report warns that slower nominal growth could put pressure on tax collections, making careful expenditure planning crucial. However, steps such as GST rationalisation and possible relief in personal income tax could help support demand and revenues. Government borrowing costs are expected to remain in the range of 6.8-7 per cent in FY27.   

 

Government borrowing to rise moderately

 

Net central government borrowing in FY27 is expected to rise to ₹11.7 trillion, about 70 per cent of the fiscal deficit. Gross borrowing is estimated at ₹16.3 trillion, while repayments could be around ₹4.6 trillion.

 

State governments are expected to borrow ₹12.6 trillion gross, with net borrowings of about ₹8.4 trillion. Given the large borrowing programme, SBI Research says the Reserve Bank of India may need to conduct more open market operations (OMOs) to manage liquidity and yields.

 

Direct taxes dominate revenue mix

 

Direct taxes now make up 59 per cent of total tax revenue, the highest share in 15 years. Personal income tax collections have overtaken corporate tax collections since FY21, and SBI expects this trend to continue in FY27. At the same time, the share of indirect taxes has declined to about 41 per cent.

 

Non-tax revenue to stay stable

 

Non-tax revenue growth is expected to remain modest. Dividends from the RBI and public sector banks are likely to stay broadly in line with previous years. However, the report notes that market volatility could affect disinvestment proceeds, making non-tax revenue less predictable in FY26 and FY27.

 

Capital expenditure may cross ₹12 trn

 

Government capital expenditure is expected to cross ₹12 trillion in FY27, marking a year-on-year growth of about 10 per cent. When grants for capital assets and CPSE investments are included, total public sector capex could reach nearly ₹20 trillion, around 5.5 per cent of GDP.

 

Large transfers to states, but clarity needed

 

States are expected to receive ₹23.1 trillion in FY26 as their share of central taxes and grants, accounting for about 54 per cent of the Centre’s gross tax revenue. While transfers remain substantial, SBI Research highlights continued ambiguity over the timing and exact size of transfers due to cesses and surcharges.   

 

Centre aims to cut debt to 50% of GDP by FY31

 

The central government aims to gradually reduce its debt-to-GDP ratio to about 50 per cent by March 2031, provided there are no major external shocks. Over the next five years, gross market borrowings could total ₹94-95 trillion, posing challenges in diversifying funding sources. SBI suggests tapping alternative sources such as small savings more actively.

 

States’ debt remains a concern

 

Although overall state government debt has declined to 28.4 per cent of GDP, it remains well above the 20 per cent level recommended by the FRBM Review Committee. SBI Research points out that states now account for a large share of general government debt, making coordination between the Centre and states increasingly important.

 

The report recommends that state budgets clearly outline medium-term, scenario-based debt reduction paths instead of focusing only on annual deficit targets.

 

Suggestions to boost household financial savings

 

SBI Research flags a decline in household financial savings in bank deposits and suggests several tax changes to reverse this trend. These include aligning tax treatment of deposit interest with capital gains, reducing the lock-in period for tax-saving fixed deposits to three years and removing TDS on savings bank interest.

 

Insurance sector needs urgent support

 

Insurance penetration in India fell to 3.7 per cent in FY25, mainly due to a drop in life insurance coverage. SBI Research urges the government to offer higher tax incentives for health and term insurance, improve claims settlement, expand digital distribution and consider a public-private disaster insurance pool to cover losses from natural calamities.