The spotlight will be firmly on the fiscal deficit numbers when finance minister Nirmala Sitharaman presents the Union Budget next month, with economists and market participants expecting the government to meet its FY26 fiscal deficit target of 4.4 per cent of GDP despite a shortfall in tax revenues. Most analysts also expect the government to remain on the fiscal consolidation path, projecting a lower deficit of around 4.2–4.3 per cent of GDP for FY27.

In the FY26 Union budget, the government had pegged the fiscal deficit in absolute terms at ₹15.69 lakh crore. As of November 2025, the deficit stood at ₹9.7 lakh crore, or 62.3 per cent of the full-year estimate.

Net tax revenue collections, however, have lagged. As of November, collections stood at ₹13.93 lakh crore, representing just 49.1 per cent of the budgeted target of ₹28.37 lakh crore. Revenues are expected to fall short of estimates amid tax concessions aimed at boosting consumption and economic growth. The government has estimated a revenue foregone of ₹1 lakh crore from income tax rationalisation and ₹47,700 crore from GST changes. Analysts expect net tax revenues to reach about ₹26.5 lakh crore in FY26.

In contrast, non-tax revenues have been strong. Collections stood at ₹5.16 lakh crore as of November, already 88.6 per cent of the budgeted ₹5.83 lakh crore, aided largely by a record surplus transfer of ₹2.68 lakh crore from the Reserve Bank of India.

On the expenditure front, a significant portion of capital spending has been front-loaded in the first half of FY26, while revenue expenditure has remained relatively subdued. Capital expenditure stood at ₹6.58 lakh crore as of November, accounting for 58.7 per cent of the annual target of ₹11.21 lakh crore. Revenue expenditure, at ₹22.67 lakh crore, was 57.5 per cent of the budgeted ₹39.44 lakh crore.

“The implied run-rate for overall tax collections remains steep versus budget estimates, despite the robust trend in non-tax revenues partially offsetting the loss,” Morgan Stanley India said in a report. “To meet the deficit target, we anticipate expenditure rationalisation, particularly on the revenue spending front, while capex tracks largely in line with budgeted estimates.” The report said the Centre’s fiscal deficit is expected to consolidate at 4.4 per cent of GDP in FY26 and be projected at 4.2 per cent in FY27.

Morgan Stanley added that the pace of consolidation would support a reduction in central government debt to 55.1 per cent of GDP in FY27 from 56.1 per cent in FY26, aided by higher nominal growth and improved tax buoyancy.

Echoing similar views, Soumya Kanti Ghosh, group chief economic adviser at SBI, said that while tax revenues may undershoot budgeted levels, higher non-tax revenues and lower overall expenditure would keep the fiscal deficit largely unchanged. “With the revised GDP base, the fiscal deficit as a percentage of GDP is likely to remain at 4.4 per cent,” he said.

Sakshi Gupta, principal economist at HDFC Bank, said the government is likely to achieve the 4.4 per cent target for FY26 and could lower the benchmark to 4.2 per cent of GDP in FY27, with around 71 per cent of the deficit financed through net market borrowings.

PwC partner and economic advisory services leader Ranen Banerjee told PTI that the fiscal deficit could be pegged at 4.3 per cent of GDP “to signal that the government is not only meeting but overachieving on fiscal consolidation.”

Analysts at Motilal Oswal said they do not expect any populist measures or large tax giveaways in the upcoming budget, given the emphasis on fiscal discipline.

Capex momentum

Rating agency Icra expects the Centre’s capital expenditure momentum to continue in FY27, with spending estimated at ₹13.1 lakh crore compared with about ₹11 lakh crore in FY26. “We believe the government will increase capex by around 14 per cent before fiscal rigidities set in from FY28 due to the 8th Central Pay Commission’s recommendations,” Icra said, quoting an ANI report.

EY India noted that the country is expected to maintain a real GDP growth trajectory of 6.2 per cent in FY27, rising to 6.5 per cent by FY29 and continuing through FY31, according to IMF projections. This, it said, would be feasible if fiscal policy continues to prioritise annual capital expenditure growth of 15–20 per cent while adhering to the consolidation path.