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India’s Reform: India is entering a crucial phase in its economic planning as policymakers prepare for the Union Budget 2026–27. Recent policy signals, reform-oriented announcements, and fiscal discipline measures suggest that the coming budget will aim to balance growth aspirations with macroeconomic stability. According to an assessment by HSBC, the government appears ready to push ahead with another round of structural reforms while maintaining restraint on public finances. This approach reflects a broader intention to strengthen long-term economic fundamentals without triggering fiscal stress.

Budget Timeline and Policy Context

The Union Budget will be presented on February 1, followed shortly by the monetary policy announcement from the Reserve Bank of India on February 6. The close sequencing of these two major events is significant, as it allows fiscal and monetary authorities to align their strategies. While the budget outlines taxation, expenditure, and borrowing plans, the central bank’s policy stance will influence liquidity conditions, interest rates, and overall financial stability. Together, these decisions will shape market sentiment and investor confidence for the year ahead.

Focus on Restraint and Structural Reforms

HSBC’s analysis highlights two core pillars likely to guide government action: restraint and reforms. Fiscal restraint is expected to continue in order to keep public finances on a sustainable path. At the same time, reforms are seen as essential to unlock productivity, improve competitiveness, and encourage private investment. This dual approach suggests that the government does not view fiscal consolidation and economic expansion as mutually exclusive, but rather as complementary objectives.

Fiscal Deficit Outlook and Revenue Management

One of the key expectations outlined in the report is that the government will meet its fiscal deficit target of 4.4 percent of GDP for FY26. This is noteworthy given recent tax rate reductions that could potentially lower revenue collections. However, the shortfall is expected to be partially offset by strong dividend transfers from the central bank and public sector undertakings, along with tighter control over current expenditure. Such revenue management strategies demonstrate a pragmatic approach to balancing growth-supportive tax policies with fiscal discipline.

Expenditure Rationalisation and FY27 Projections

Looking ahead to FY27, the report anticipates further pruning of government schemes to reduce expenditure pressures. Rationalisation of subsidies and centrally sponsored programs is expected to create fiscal space without compromising essential welfare objectives. As a result, HSBC forecasts a fiscal deficit of around 4.2 percent of GDP in FY27. This gradual consolidation trajectory is considered appropriate for maintaining credibility while avoiding abrupt spending cuts that could hurt growth.

Borrowing Strategy and Debt Sustainability

On the borrowing front, the government is expected to maintain a net borrowing figure of approximately Rs 11.5 lakh crore in FY27. Although gross borrowing could rise to around Rs 16 lakh crore due to high redemption obligations, the overall increase in borrowing is projected to remain below nominal GDP growth. This makes the debt load manageable and limits pressure on interest rates. Importantly, the fiscal impulse is expected to remain near neutral, supported by steady dividend inflows and a measured pace of consolidation.

Long-Term Debt Targets and State Finances

The current consolidation path is seen as consistent with the central government’s objective of meeting its public debt target by FY31. However, the situation for state governments may differ. Unlike the centre, states do not yet have a clearly defined consolidation roadmap, which could lead to a temporary rise in their debt ratios over the next few years. Even so, when central and state borrowing are considered together, overall market borrowing growth is expected to remain slightly below nominal GDP growth, an improvement compared to FY26.

Domestic Reform Agenda and Investment Focus

On the domestic front, continued deregulation at both the central and state levels is anticipated. Manufacturing incentives targeted at small and medium enterprises are expected to remain a priority, supporting job creation and supply chain resilience. Capital expenditure is also likely to be diversified, with a greater emphasis on capex-related loans to states. These measures aim to crowd in private investment and strengthen infrastructure without excessively burdening the central budget.

External Sector Reforms and Global Integration

Externally, the report points to a significant effort to rationalise customs duties and gradually withdraw non-tariff barriers. Greater openness to foreign direct investment across multiple sectors is also expected. Such steps would enhance India’s integration into global value chains, improve export competitiveness, and attract long-term capital inflows. Together, these external reforms complement domestic initiatives by creating a more predictable and business-friendly trade environment.

In summary, the forthcoming Union Budget 2026–27 is expected to reinforce India’s reform momentum while keeping fiscal indicators on a stable path. By combining prudent financial management with targeted structural changes, policymakers aim to support sustainable growth and maintain economic resilience in an increasingly complex global environment.