Union Budget 2026 unlikely to spring tax surprises as capex focus stays intact: DBS report

India’s upcoming Union Budget for FY27 is expected to stay the course on fiscal consolidation while continuing to prioritise capital expenditure, with no major tax surprises on the horizon, according to Radhika Rao, Senior Economist at DBS Group. The report clearly states that policymakers are unlikely to spring any last-minute tax changes, noting, “We don’t expect any surprise tax announcements in the Budget presentation,” as recent income tax relief, GST rate rationalisation, and selective excise and cess measures are already built into the fiscal math.

Capital expenditure is projected to remain robust at around 3–3.1% of GDP in FY27, reinforcing the government’s emphasis on infrastructure-led growth. According to the report, “Capex budget is likely to stay above 3% of GDP, with a focus on implementation,” highlighting a shift from headline allocations to execution efficiency. The emphasis is expected to be on identifying shovel-ready and greenfield projects, alongside continued concessional support for state-level capital expenditure, which DBS sees as critical to sustaining the public investment cycle.

The analysis underlines that India’s fiscal health has strengthened materially in the post-pandemic period, with the central government’s deficit having halved from earlier peaks. This improvement was acknowledged through a sovereign rating outlook upgrade in 2025. Despite near-term pressures, the report maintains confidence in fiscal discipline, stating, “We don’t expect any compromise in meeting the FY26 fiscal deficit targets.”

DBS estimates that FY26 revenues could undershoot budgeted levels by about INR 1.1–1.2 trillion, or 0.2–0.3% of GDP, driven by slower nominal GDP growth, GST rationalisation, and the cumulative impact of tax relief. However, this gap is expected to be bridged through spending recalibration. As the report puts it, “A shortfall in revenues will be compensated for by spending rationalisation,” with front-loaded capital spending likely to moderate and revenue expenditure growth remaining contained.

Looking ahead, a key structural shift in fiscal strategy is expected from FY27, with the debt-to-GDP ratio emerging as the primary anchor. The Centre aims to reduce its debt burden to about 50% of GDP by FY31 from around 56% in FY26. DBS notes that “the debt-to-GDP ratio will be the primary anchor for the FY27 Budget, aligned to deficit goals,” signalling a longer-term approach to fiscal sustainability even as the pace of consolidation moderates.

On the revenue side, the report does not anticipate significant new tax cuts or hikes, while tax buoyancy is expected to improve gradually with stronger nominal GDP growth. Non-tax revenues are likely to be supported by dividends from the central bank and state-owned enterprises, though divestment targets are expected to remain modest.

Beyond fiscal arithmetic, the Budget is expected to align with India’s strategic ambitions, including manufacturing, infrastructure, defence, and social welfare priorities. DBS adds that “Budget measures are likely to align with the economy’s strategic ambitions,” even as policymakers navigate a busy state election calendar in the year ahead.

Overall, the FY27 Budget is expected to strike a careful balance—maintaining fiscal discipline, avoiding tax shocks, sustaining capex momentum, and reinforcing India’s long-term growth strategy.