MUMBAI: Putting fiscal consolidation onto a slow lane, targeting only a 10 bps reduction from the current year to 4.3% of GDP, finance minister Nirmala Sitharaman has pushed for more borrowings at Rs 17.2 trillion as she has increased the caxpex to Rs 12.21 trillion for the next fiscal in the ninth consecutive budget presented Sunday. The budget has also presented sober outlook on the nominal GDP growth of 10.1% maginall higher than the 8% in FY26.
The higher market borrowing plan and the more than doubling of tax on futures and option trade from 0.02% to 0.05% led to a bloodbath in the market with key indices tanking 2%. The problem is not higher capex but higher debt-driven capex as when the government borrows more, so much less money is available in for non-government borrowers and that too higher cost.
The steep spike in capex from 11.21 trillion in the current fiscal, which was up only by Rs 10,000 crore from the previous fiscal, to Rs 12.2 trillion, underscores the government’s continued emphasis on public investment as a key lever to support growth at a time when private capex remains uneven.
The higher borrowing to the tune of Rs 2.5 trillion over FY27 to Rs 17.2 trillion of gross borrowings and Rs 11.7 trillion of net borrowing as Rs 5.5 trillion worth of government bonds are due for redemption next fiscal. In FY26, government’s gross market borrowings were Rs 14.8 trillion and net borrowings were Rs 12.5 trillion.
“To finance the fiscal deficit of 4.3% of GDP, the net market borrowings from dated securities are estimated at Rs 11.7 trillion. The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs 17.2 lakh crore,” she said in the budget speech. This means government will borrow Rs 2.5 trillion more than last fiscal’s.
The budget has also proposed non-debt receipts and the total expenditure at Rs 36.5 trillion and Rs 53.5 trillion, respectively while the Centre’s net tax receipts are estimated at Rs 28.7 trillion. The budget 2026 had proposed total non-debt receipts at Rs 34.96 trillion, and the total expenditure or the size of the budget is projected at Rs 50.65 trillion, up 7.4% over fiscal 2025. Net tax receipts were pegged at Rs 28.37 trillion and non-tax revenues at Rs 5.83 trillion. Of the total expenditure of Rs 50.65 trillion planned for fiscal 2026, capital expenditure was Rs 11.21 trillion or 3.1% of GDP.
The government has projected revenue receipts of around Rs 35.33 trillion for the next financial year, of which net tax revenue is estimated at around Rs 28.67 trillion and non-tax revenue of Rs 6.66 trillion, most of which is expected to come from dividends from the Reserve Bank and the companies it owns like banks as the budget is not ambitious on divestment income.
Of the total receipts of Rs 35.33 trillion, capital receipts are projected at Rs 18.14 trillion, taking the total receipts to Rs 53.47 trillion. Up from Rs 49.64 trillion. Of the total expenditure, revenue expenditure is projected at Rs 41.25 trillion and capital expenditure is seen at Rs 12.21 trillion.
Of this effective capital expenditure is steeply up from Rs 14.04 trillion in FY26 to Rs 17.14 trillion next fiscal, leading to 10% spike in the interest burden.
Revenue deficit is seen rising to Rs 5.92 trillion from Rs 5.26 trillion in FY26, taking the total fiscal deficit to Rs 16.95 trillion from Rs 15.55 trillion of which primary deficit is Rs 2.91 trillion from Rs 2.84 trillion.
Stating that one of the “main operational instruments for debt targeting is the fiscal deficit,” Sitharaman said, “I am happy to inform this august House that I have fulfilled my commitment made in FY22 to reduce fiscal deficit below 4.55 of GDP by FY26. In the revised estimate for FY26, the fiscal deficit has been estimated at par with the budget estimate of FY26 at 4.4%.
“In line with the new fiscal prudence path of debt consolidation, the fiscal deficit is estimated to be 4.3% of GDP for the next fiscal,” she said.
She said the government has been delivering on the fiscal commitments consistently without compromising on social needs. “To strive towards accepted standards of fiscal management, in budget 2026, I had indicated that the government would target reaching a debt-to-GDP ratio of 50% plus by fiscal 2031.
“In line with this, the debt-to-GDP ratio is estimated to be 55.6% of GDP in the budget 2027, compared to 56.1% of GDP in the revised estimate for fiscal 2026,” the minister said, expressing hope that a declining debt-to-GDP ratio will gradually free up resources for priority sector expenditure by reducing the outgo on interest payments.
The markets as expecting a higher reduction in the fiscal deficit targets absence of which led to the sell-off in the market.
Higher fiscal deficit has been one of the reasons for the near junk rating of the country by foreign rating agencies. All the three rating agencies have BBB- sovereign rating, with a positive outlook.
Commenting on the macro numbers, Aditi Nayar, the chief economist at Icra said the assumed nominal GDP at 1.10% may be revised upwards given the revision in the new GDP series to be unveiled by the end of February.
“The growth in gross tax revenue of 8% in the budget estimates trails that in nominal GDP of 10.1%. This is dampened in part by the ceasing of the GST compensation cess, largely on anticipated lines, even as the target for excise duty may be optimistic. Also, after an expected paring in revenue expenditure in FY26 RE vs BE, a moderate 7% rise has been budgeted for the coming fiscal, amidst a higher and unpalatable expansion of 10% in interest expenditure,” 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.
Revenue deficit is stable at 1.5% of GDP, the effective revenue deficit is halving to 0.3% of GDP in the FY27 from 0.6% of GDP in FY26, which is a positive step in terms of the quality of expenditure and the fiscal deficit,” she said.
Commenting on the steep rise in gross borrowings, Abhishek Bisen, head of fixed income at Kotak Mahindra AMC, though the budget reiterates the government’s focus on fiscal discipline and debt consolidation, underscoring its commitment to long‑term macroeconomic stability gross borrowing programme of Rs 17.2 trillion is higher than anticipated and will push up bond yields. In the immediate period, the 10‑year benchmark government security is expected to trade in the 6.65–6.75% range, with market attention now shifting to forthcoming guidance from the RBI move on the future trajectory of interest rates.