MUMBAI: Analysts and economists have said the budget 2026 targets are unambitious and unrealistic given the external pressures facing the economy.
However, the meagre 10 bps to 4.3 per cent reduction in the fiscal deficit target, coupled with the higher market borrowing and the 10 per cent increase in the interest burden have capped any room for a rating upgrade.
Moody’s Rating was quick to make a commentary, saying the 4.3 per cent fiscal deficit target reduction is the slowest since the pandemic.
“While the government continues to demonstrate its commitment to—and a lengthening track record of—fiscal consolidation, it has targeted a narrowing of the fiscal deficit by only 0.1 percentage points of GDP in fiscal 2027, the smallest pace of reduction since India emerged from the pandemic,” Christian de Guzman, senior vice-president at Moody's Ratings, said.
“As such, the deficit remains wider than any of those incurred during the current government’s first term in office. Thus, the budget does not lead to a re-rating of the sovereign ratings,” he added.
In addition to the continued spending on infrastructure, the budget provides tactical support for the economy against the backdrop of prevailing external uncertainties, including the unresolved issues around US tariffs, and despite the proven resilience of economic growth over the past year, he said.
He added that the support for the economy, which includes measures announced in recent months such as GST rate cuts, will lead to an ongoing erosion of tax revenue as a share of GDP that will worsen debt affordability as measured by interest payments relative to revenue.
“Moreover, we do not expect significant progress on debt reduction, which supplants deficit consolidation as the anchor for fiscal policy, leaving our broader assessment of the country’s fiscal strength intact,” Christian said.
Aditi Nayar, the chief economist at Icra Ratings, however, said the deficit target is as per her expectations.
“The assumption made for nominal GDP at 10 per cent mildly exceeds our projection of 9.8%, although the new GDP series to be unveiled by the end of February may well reveal higher levels for nominal GDP after taking into account more updated information,” she added.
On the market borrowing of Rs 17.2 trillion planned, Nayar said, “while in absolute terms, interest payments continue to exceed capital expenditure, an important feature is the sharp 60% expansion in grants in aid for creation of capital assets. Notably, expenditure is booked as capex only in the books of that tier of government that owns the assets.
“As a result, while the revenue deficit is stable at 1.5 per cent of GDP, the effective revenue deficit is halving to 0.3 per cent of GDP in the FY27 from 0.6 per cent of GDP in FY26 RE, which is a positive step in terms of the quality of expenditure and the fiscal deficit. But yet the government’s debt burden will increase by 10 per cent due to this.”
Sakshi Gupta, principal economist at HDFC Bank, said that amidst rising global uncertainties, the budget focuses on laying down a medium-term roadmap for boosting domestic growth and productivity.
Unlike the previous budget, where a push to consumption was prioritised through income tax rationalisation, this budget shifted attention towards promoting manufacturing and the service sector.
“In terms of the fiscal math, the budget remains conservative, accounting for 10.1 per cent nominal GDP growth for FY27, lower than our estimate of 10.5 per cent. On the capex target, the government, as expected, targeted moderate growth of 11.5 per cent in FY27 while banking on attracting private capital. The fiscal math broadly seems credible and prudent, aiming for gentle fiscal consolidation for FY27,” she said.
“That said, the higher-than-expected gross borrowing of Rs 17.2 trillion could weigh on market sentiments as demand and supply imbalance has already been weighing on bond yields. We expect the 10-year bond yield to open higher tomorrow,” Gupta said.
Dipti Deshpande, principal economist at Crisil Ratings, said, having brought the macro house in order, the budget announcements have focused on sustenance of growth and resilience.
“A realistic nominal GDP growth assumption lends credibility to tax revenue targets, even as the capex thrust continues. This budget clearly takes a step ahead in improving the expenditure mix through rationalisation of food and fertiliser subsidies and alongside furthering capex on roads, railways, defence, power, as well as on affordable housing.
On the shift in the fiscal goalpost—from fiscal deficit to debt— according to Deshpande, “allows the government more discretion in managing the fiscal deficit, such that deficit reduction may even pause in a few years, enabling countercyclical fiscal support, especially during periods of shock. The agency expects GDP growth at 6.7 per cent and consumer price inflation at 2.5 per cent in fiscal 2027.”
Radhika Rao, senior economist at DBS Bank, said the budget aligns fiscal discipline with strategic priorities as it has increased allocations for infrastructure, alongside strengthening domestic capabilities across both key labour-intensive and emerging sectors.
“Overall, the budget preserves macroeconomic stability and maintains continuity in policy. Fiscal consolidation will continue, with the debt-to-GDP ratio projected to decline by around 0.5 per cent and the fiscal deficit expected to narrow to 4.3 per cent of GDP.
