New Delhi: Buoyant revenue streams are expected to give the government room to sustain capital expenditure at around 3.1 per cent of GDP while continuing with fiscal consolidation, according to a pre-Budget report by ICICI Bank Global Markets.
The report noted that growth in 2025-26 was supported by both fiscal and monetary stimulus amid rising external headwinds. On the fiscal side, income tax and GST-related stimulus together amounted to about 0.9 per cent of GDP. While this aided a pickup in private demand, it also weighed on tax collections. As a result, the report said some spending restraint may be required to achieve the fiscal deficit target of 4.4 per cent of GDP in 2025-26.
Looking ahead, the revenue outlook for 2026-27 is expected to be significantly stronger, aided by a low base and improving demand conditions. Non-tax revenues are also projected to remain elevated, providing additional fiscal headroom.
“This gives the government room to keep capex at 3.1 per cent of GDP while continuing on the path of consolidation,” the report said. In the 2025-26 Union Budget, capital expenditure of Rs 11.21 lakh crore, or about 3.1 per cent of GDP, was earmarked, marking a year-on-year increase. Against this backdrop, the report suggested that the focus of the forthcoming Union Budget should be on improving the ease of doing business and advancing deregulation, including alignment of customs duties and processes. It also underscored the need for targeted incentives to crowd in private investment, particularly in manufacturing.
The report said the FY27 Union Budget is likely to act as an enabler by focusing on measures to boost investment, promote foreign inflows, deregulate sectors and rationalise customs procedures. For 2026-27, it expects the government to target a fiscal deficit of 4.2 per cent of GDP.
As per convention, the Union Budget for 2026-27 will be presented in Parliament on February 1, 2026.