Union Budget 2026-27: How India's fiscal math works under the new debt rule, in charts
The Union Budget 2026-27 marks a structural shift in fiscal policy, replacing deficit targets with a debt-to-GDP anchor—reshaping how India balances spending flexibility, revenue pressure and long-term sustainability.
The Union Budget 2026-27 marks a fundamental shift in India’s fiscal framework. Starting next fiscal, the government has adopted the debt-to-GDP (gross domestic product) ratio as its main fiscal anchor, marking a strategic departure from the traditional focus on fiscal deficit.
While this new framework gives the government room to increase spending during economic shocks, it intensifies the focus on revenue performance and the government’s ability in meeting its debt obligation sustainably.
In the latest Budget presented today by Finance Minister Nirmala Sitharaman, the government has set its fiscal deficit at 4.3% of GDP for 2026-27, down from 4.4% of GDP in 2025-26 (revised estimate) and 4.8% in 2024-25. The latest fiscal deficit target marks a 10 basis-points reduction from the previous year.
Every Union Budget since the pandemic, the government has promised higher capital expenditure, one of the two major components of spending, and this year is no exception. The Centre has increased the allocation for capital outlay to ₹12.2 trillion, up 11.5% from ₹10.6 trillion in previous fiscal’s revised estimates.
However, as a share of nominal GDP, capital expenditure, will remain flat at 3.1% of GDP, unchanged from the previous fiscal year and below the 3.2% in 2024-25. After raising capital expenditure from 1.6% of GDP in 2018-19 to 3.4% in 2023-24, the government has chosen a more modest path for the upcoming fiscal year.
Meanwhile, revenue expenditure, the other major component of spending, continues its decline as a share of GDP. The government has budgeted it at 10.5% of GDP, down from 10.8% in previous year’s revised estimates.
Additionally, even as a share in overall expenditure, revenue expenditure has been on a sustained downward trend since 2021-22, rising only marginally in 2025-26 before declining again in 2026-27.
However, under the new fiscal framework, these annual spending decisions are now guided by a more fundamental metric, which is the total debt accumulated over the years.
Based on the latest 2026-27 Budget and recent fiscal policy announcements, the government has committed to a medium-term goal of reducing the central government's debt-to-GDP ratio to 50%, with a 1% buffer on either side, by the fiscal year 2030-31. This target is aligned with the 16th Finance Commission cycle, covering 2026-27 to 2030-31.
The latest figures show the debt-to-GDP ratio stands at 55.98% for 2024-25 and is projected to edge up to 56.15% in 2025-26 (revised estimates), before moderating to 55.63% for 2026-27 (budget estimates). The government has managed to stabilize the debt ratio following its high of 60.84% in 2020-21, when the fiscal deficit had overshot to 9.2% of GDP.
Moving beyond the headline figures, the government's gross tax revenues are projected at a modest 11.2% of total GDP for 2026-27. The sharing of revenue, which is often a point of contention between the Centre and the states, shows the share of states budgeted at 34.7% of the Centre's gross tax collections, up from the 34.2% in 2025-26.
As per the 16th finance commission, the share of states in the central taxes for the 2026-31 period is recommended to be 41%, same as the devolution recommended by the 15th finance commission for 2021-26 period.
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