Union Budget 2026: Fitch flags slower deficit consolidation, sees growth-neutral stance

Fitch Ratings said on Monday the Union Budget 2026-27 signals a deliberate slowdown in fiscal consolidation, with the government opting to preserve capital spending to support growth rather than push harder on deficit reduction.The ratings agency noted that the government’s FY27 fiscal deficit target of 4.3% of GDP represents only a marginal improvement from the 4.4% projected for FY26, and sits slightly above Fitch’s own expectation of 4.2%. It said the modest pace of consolidation reflects the increasing difficulty of reducing the deficit further without weighing on economic growth.

Also Read: Unremarkable Budget, critics’ choice rather than crowd-pleaser, Swaminathan Aiyar says

“The slowing pace of consolidation is in line with our view that further progress on deficit reduction is becoming more difficult without compromising more on GDP growth,” said Jeremy Zook, Director and Primary Sovereign Analyst for India at Fitch Ratings, adding that the government had chosen to keep capital expenditure broadly steady at 3.1% of GDP rather than pursue deeper consolidation.

Finance Minister Nirmala Sitharaman, in her budget presented on Sunday, reaffirmed the government’s commitment to fiscal discipline while maintaining a strong push on public investment, a strategy that has underpinned growth in recent years amid uneven private investment. Capital spending was again positioned as a key lever to crowd in private sector activity and bolster medium-term growth prospects.

Fitch described the budget as broadly neutral for India’s FY27 growth outlook, reiterating its forecast of 6.4% GDP growth for the fiscal year. It said the continued emphasis on capex should remain supportive of both near and medium-term economic prospects, particularly as private investment has yet to fully recover.

Also Read: Build, India, Build: Govt assures backing for infrastructure developersThe agency welcomed the government’s decision to reaffirm its fiscal anchor of reducing central government debt to 50% of GDP (±1 percentage point) by FY31, calling it a positive signal of ongoing efforts to strengthen fiscal management. However, Fitch cautioned that achieving this target would likely require further consolidation, with deficits moving closer to 4% of GDP over time.

While the budget did not announce any major new structural reforms, Fitch said it expects additional measures to follow, particularly on deregulation, building on reforms undertaken over the past six months. It added that sustained strong growth, combined with improved fiscal transparency and spending quality, could gradually strengthen India’s sovereign credit profile, even as deficits, debt and interest costs remain elevated compared with peers.