The government is likely to place reforms at the forefront of the Union Budget 2026-27, while keeping a close watch on fiscal discipline, an HSBC report released on Tuesday has indicated.
The government will table the Budget in Parliament on February 1, shortly before the Reserve Bank of India announces its monetary policy on February 6. HSBC noted that the proximity of these two events makes the period particularly significant for shaping the overall economic outlook.
“We believe the government will focus on two pillars during such time – restraint and reforms,” the HSBC report mentioned.
While pursuing structural improvements, the government is likely to ensure that consolidation efforts remain firmly on track.
HSBC projected that the Centre would meet its FY26 fiscal deficit goal of 4.4 per cent of GDP. Any revenue shortfall arising from recent tax reductions is expected to be compensated by higher dividend payouts from the RBI and public sector enterprises, as well as tighter control over routine spending.
Medium-Term Fiscal Path
The HSBC report said, “We expect that pruning of schemes will help the government lower its expenditure in FY27, and we forecast a fiscal deficit of 4.2% of GDP.”
The government plans to keep net market borrowing steady at ₹11.5 lakh crore in FY27. However, substantial debt redemptions, even after factoring in possible switches, could raise gross borrowing to around ₹16 lakh crore.
“But growth in borrowing would still be below nominal GDP growth, making it manageable. The fiscal impulse will likely be near-neutral despite fiscal consolidation, helped by a lower quantum of consolidation and elevated receipts from RBI dividends again,” the report added.
HSBC observed that the current scale of fiscal consolidation is consistent with the central government’s objective of meeting its public debt target by FY31. In contrast, state governments may experience a gradual rise in their debt ratios over the coming years, owing to the absence of a comparable consolidation framework.
On the domestic side, the report anticipates the continuation of deregulation initiatives at both central and state levels, enhanced manufacturing incentives for smaller enterprises, and a shift in capital expenditure towards greater support for state-level projects. It also expects further streamlining of subsidies and centrally sponsored schemes.
“On the external front, we expect a significant exercise to rationalise customs duties, continued withdrawals of non-tariff barriers, and more openness to FDI across sectors,” the report concluded.
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