Budget 2026 expectation: Slow tax growth limits fiscal space, but capex remains focus, says CareEdge

Gross tax collections have been subdued, growing only 3.3% year-on-year in the first eight months of FY26, far below the budgeted growth of 12.5%. Both direct and indirect tax revenues are expected to undershoot estimates, leading to a projected shortfall of around ₹3 trillion for the full fiscal year. While collections are likely to improve in FY27, CareEdge Ratings expects tax buoyancy to remain modest at 0.95, signalling limited upside even with nominal GDP growth projected at about 10.1%.

In its Union Budget FY27 expectations report, CareEdge said the weak tax performance in FY26 has created a challenging base for the next fiscal. Slower growth in personal income tax and subdued indirect tax collections have weighed on overall revenues, even as expenditure commitments remain elevated. As a result, the government’s ability to accelerate fiscal consolidation in the near term could be constrained.

Despite revenue pressures, the Centre is expected to stay committed to its fiscal consolidation roadmap. CareEdge estimates the fiscal deficit for FY26 at 4.4% of GDP, slightly higher than the Budget estimate, and expects it to be budgeted in the range of 4.2–4.3% of GDP in FY27. The report notes that consolidation is likely to be gradual, balancing the need for growth support with medium-term fiscal discipline.

Capex in FY27

Capital expenditure continues to be the cornerstone of the government’s growth strategy. Public capex grew 28.2% year-on-year during April–November FY26, and CareEdge expects the Centre to meet its full-year capital spending target of ₹11.2 trillion. For FY27, capital expenditure is projected to rise by about 10% to ₹12.3 trillion. The capex-to-revenue expenditure ratio is expected to remain healthy at around 0.3, underscoring the continued focus on investment-led growth, particularly in infrastructure.

Non-tax revenues have emerged as a key buffer against tax underperformance. The report highlights that non-tax revenues grew 20.9% in the first eight months of FY26, supported largely by a higher-than-expected dividend transfer from the Reserve Bank of India. CareEdge estimates that non-tax revenues could exceed Budget estimates by about Rs 0.3 lakh crore in FY26. However, RBI dividend transfers are expected to normalise in FY27 to around Rs 2.0–2.5 lakh crore, compared with Rs 2.7 lakh crore in FY26, limiting the extent of support from this source.

Infra, job creation

On the expenditure side, the government is expected to maintain its emphasis on infrastructure, job creation and manufacturing. A survey conducted by CareEdge as part of the report indicates that infrastructure spending is likely to remain the top Budget priority in FY27, followed by measures to boost employment, research and development, and support for MSMEs and export-oriented sectors. Respondents also highlighted trade agreements as a critical lever to support exports amid global uncertainty.

The report flags geopolitical risks and employment generation as the key macroeconomic challenges going into FY27. While India’s growth prospects remain relatively strong compared with global peers, CareEdge cautioned that external headwinds, coupled with domestic revenue constraints, will require careful policy calibration.

Overall, the report suggests that the Union Budget FY27 is likely to strike a fine balance between fiscal prudence and growth imperatives. While slower tax revenue growth may limit room for aggressive deficit reduction, sustained public investment and targeted support for key sectors are expected to remain central to the government’s strategy.