Fiscal space for FY27 limited, conditional, say economists

• Expenditure savings to remain a buffer

- PRASANTA SAHU

AS THE UNION government prepares for the 2026-27 Budget, it confronts a familiar but increasingly delicate policy challenge: how to support domestic growth amid an uncertain global environment while remaining firmly committed to its medium-term fiscal consolidation and debt-reduction goals.

Economists broadly agree that some fiscal space exists for FY27, but caution that it is limited, conditional, and highly sensitive to macroeconomic assumptions, execution capacity, and the credibility of the Centre's evolving fiscal framework.

A critical anchor for FY27 will be the fiscal outcome of the current year. According to Ranen Banerjee, Partner and Leader, Economic Advisory at PwC India, if revenue expenditure and capital expenditure in the final four months of FY26 follow patterns observed in recent years, the government is likely to meet its fiscal deficit target, or overshoot it only marginally. This sets a relatively stable base for next year's Budget arithmetic.

Banerjee's FY27 projections rest on three key assumptions: expenditure growth on both the revenue and capital sides rises at the same pace over revised estimates as seen last year; tax buoyancy is assumed at a conservative 1.0; and nominal GDP growth is budgeted at around 10%. If these assumptions hold, and the Centre chooses to cap the fiscal deficit at about 4% of GDP in FY27, he estimates that the government could have additional fiscal headroom of nearly ₹2 lakh crore.