FOREWORD

The Union Budget FY27 reflects a deliberate policy choice to reinforce fiscal credibility, macroeconomic stability, and medium-term debt sustainability, at a time when global financial conditions remain tight and uncertainty around capital flows persists. From a credit perspective, the Budget is broadly supportive of sovereign stability and corporate credit resilience, despite near-term pressures arising from higher government borrowing.

A key structural feature of the Budget is the adoption of a debt-anchored fiscal framework, with the central government committing to reduce the debt-to-GDP ratio to 50% (±1%) by FY31. The FY27 fiscal deficit target of 4.3% of GDP, along with a projected reduction in the debt ratio to 55.6%, enhances medium-term fiscal visibility and strengthens policy credibility. While the pace of consolidation remains gradual, the direction and transparency of the framework are positive from a sovereign risk assessment standpoint.

The fiscal arithmetic underlying the Budget appears largely credible, supported by conservative assumptions on growth and revenues. The potential for nominal GDP growth to marginally exceed budgeted levels provides a buffer against revenue slippages, reducing downside risks to headline deficit outcomes. Importantly, fiscal consolidation continues to be driven by restraint in revenue expenditure, while capital expenditure is preserved—an approach that supports long-term growth without undermining fiscal sustainability.

Capital expenditure has been maintained at ₹12.2 lakh crore (3.1% of GDP), the highest in absolute terms to date. Although the growth rate of capex has moderated compared to the post-pandemic period, the quality of fiscal adjustment continues to improve, as reflected in the capex-to-revenue expenditure ratio reaching a multi-decade high. This composition of spending is structurally credit positive, particularly for infrastructure-linked sectors such as roads, railways, ports, logistics, defence manufacturing, and urban infrastructure, where public investment plays a catalytic role in supporting cash flow stability and execution visibility.

At the same time, the Budget signals a calibrated approach to future fiscal risks. The moderation in capex growth acknowledges emerging expenditure pressures, including those associated with the implementation of the Eighth Pay Commission. This measured stance reduces the risk of sharp fiscal reversals or abrupt increases in borrowing requirements in subsequent years.

From a government borrowing perspective, the provision of net market borrowing of ₹11.7 lakh crore for FY27 is higher than market expectations and is likely to exert near-term pressure on sovereign bond yields, particularly in an environment of elevated gross supply and sustained state government borrowings. However, the commitment to fiscal consolidation and the absence of material off-budget liabilities mitigate medium-term concerns around debt sustainability. In this context, active liquidity and duration management by the Reserve Bank of India is expected to play a role in ensuring orderly market conditions.

For corporate bond markets and rated issuers, the Budget is incrementally credit supportive. Policy continuity in infrastructure development, manufacturing incentives, MSME financing and services exports improves earnings visibility and refinancing prospects across several sectors. Initiatives such as the proposed Infrastructure Risk Guarantee Fund, monetisation of public assets through REITs, long-term incentives for data centres, and targeted support for manufacturing and clean energy are expected to reduce execution risk and improve project bankability, particularly for long-gestation assets.

Overall, the Union Budget FY27 strengthens the macro-fiscal anchor underpinning India’s credit ecosystem. While higher sovereign borrowing may weigh on yields in the near term, the emphasis on fiscal discipline, improved expenditure quality and structural growth enablers supports sovereign credit stability and corporate credit quality over the medium term. The Budget provides policy continuity and visibility, which remain critical for sustaining confidence among bond investors, lenders, and rated issuers.