‘New fiscal rule’: Budget 2026 shift that stock investors must know

In its Budget 2026 preview note, Nomura said the government is set to shift its fiscal anchor from targeting the fiscal deficit to targeting debt as a share of gross domestic product (GDP). The goal, the foreign brokerage said, is to bring central government debt down to 50 per cent of GDP, with a tolerance band of plus or minus 1 per cent, by FY31 from around 56 per cent of GDP in FY26. 

"This directly addresses the criticism of credit rating agencies that India’s debt is too high, while offering more fiscal space to the government to manoeuvre through business cycles," Nomura said.

It cited reports suggesting the government could target a debt ratio of 55 per cent of GDP in FY27. 

Stock markets had, in the past, tracked fiscal deficit projections closely. For instance, on February 1, 2020, Budget day, the BSE Sensex closed 987.96 points, or 2.43 per cent, lower at 39,735, while the NSE 50 share index Nifty50 ended 300 points, or 2.51 per cent lower at 11,661.85.

Finance Minister Nirmala Sitharaman pegged the fiscal deficit at 3.8 per cent for the ongoing financial year, compared with the earlier target of 3.3 per cent of GDP. For FY26, Nomura expects the government to meet its budgeted fiscal deficit target of 4.4 per cent of GDP. It sees a fiscal deficit target for FY27 at 4.2 per cent. 

Unlike the fiscal deficit, public debt is not entirely under the government’s direct control. The debt to GDP ratio depended not only on the primary deficit, defined as non-interest expenditure net of revenues, but also on the extent to which nominal GDP growth exceeded the nominal interest rate, Nomura noted.

Implications of debt targeting

Nomura's analysis flagged two key implications of a debt-targeting framework. First, the primary deficit would become the most important metric to monitor, as it lay largely within the government’s control. 

This marked a shift away from the market’s traditional focus on the fiscal deficit.

Second, the implied fiscal deficit target in any given year would not need to be rigid. Stronger nominal GDP growth or a lower interest burden could offset slippage in the fiscal deficit while still delivering the same debt outcome.

"At this point, there is uncertainty on what kind of fiscal deficit path the government is planning in order to achieve its debt targets. Further clarity on the finer points of this new fiscal rule will be crucial on Budget day to keep India’s fiscal risk premium in check," Nomura said on January 15.

Nomura's simulations suggested that, assuming medium-term nominal GDP growth of around 10.5 per cent and interest rates in the 6.5 to 7 per cent range, maintaining a primary deficit of around 0.5 per cent of GDP would allow public debt to moderate to about 50 per cent of GDP by FY31. 

This, it said, implied a mild consolidation in the fiscal deficit over the medium term, from 4.4 per cent of GDP in FY26, which could be sufficient to achieve the stated debt targets.