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Informist, Friday, Jan. 9, 2026

 

--NR Bhanumurthy: FY27 Budget must lay down medium-term fisc gap glide path

--NR Bhanumurthy: Need to relook debt-to-GDP glide path post fin panel view

--CONTEXT: Economist NR Bhanumurthy's comments in an interview 

--NR Bhanumurthy: Govt may assume FY27 nominal GDP growth at 9-10%

--NR Bhanumurthy: Govt fisc consolidation growth-supportive, on right path

--NR Bhanumurthy: GST, income tax collections may improve FY27

By Priyasmita Dutta and Pratiksha

 

NEW DELHI – The Union Budget for 2026-27 (Apr-Mar) should focus on laying down a medium-term fiscal deficit glide path, economist N.R. Bhanumurthy said, adding that he believes a debt-to-GDP glide path isn't enough to ensure fiscal discipline. "There is a need for a fiscal deficit path as well, consistent with the public debt and the nominal GDP growth path," Bhanumurthy, director of Madras School of Economics, said.

 

"They're all interlinked. It depends on what deficit path that we are going to assume, the outcome of that would be your debt path," he told Informist in an interview. "While debt is an anchor, we need instrument to achieve and that instrument is deficit". 

 

Finance Minister Nirmala Sitharaman is likely to present the Budget for FY27 on Feb. 1. The government has projected its fiscal deficit for FY26 at 4.4% of GDP, marking the last leg of the fiscal consolidation roadmap before it shifts to a different metric of fiscal discipline. The Centre has announced that from FY27, it will target the debt-to-GDP ratio.

 

According to the Budget document for FY26, the government aims to keep its fiscal deficit at a level each year such that the central government debt will be on a declining path as a percentage of GDP. Its target for fiscal consolidation is the Centre's debt at 50% of GDP, plus or minus 1%, by FY31. Government debt is projected to reach 56.1% of GDP at the end of FY26.

 

According to Bhanumurthy, the debt-to-GDP ratio glide path will also need to consider the 16th Finance Commission's recommendations, which will be tabled in Parliament on the day the Union Budget is presented. "FC (finance commission) recommendations are not just limited to vertical and horizontal devolution, but also about what would be the fiscal framework that the Finance Commission would have recommended," he said.

 

The commission, which submitted its report to the president on Nov. 17, is tasked with determining the formula for states' share of central taxes and grants-in-aid for five years starting FY27.

 

Bhanumurthy also said a medium-term fiscal glide path would help the government determine the fiscal space available annually for capital expenditure and revenue expenditure, and undertake growth-supportive measures accordingly.

 

BUDGET MATH

Bhanumurthy said the debt-to-GDP ratio glide path, detailed in the FY26 Budget, was based on three simulations – nominal GDP growth assumed at 10%, 10.5%, and 11% – but the present nominal GDP growth is estimated lower at 8%. Therefore, in view of lower nominal GDP growth, the government may need to recalibrate its targets, he said. "The current 8% nominal growth is way off from three simulations. Now, if nominal growth continues to be in single digits, then we may need to relook the glide path," Bhanumurthy said. He expects the forthcoming Budget to assume nominal GDP growth in the range of 9-10% for FY27.

 

The Indian economy grew 7.4% in FY26, according to the first advanced estimate released by the statistics ministry Wednesday, marginally higher than the 7.3% projected by the Reserve Bank of India. Nominal GDP, however, grew 8% in FY26, as against the Budget assumption of 10.1%, the ministry said. The nominal GDP assumed in the Budget is crucial as it determines key Budget targets, including fiscal deficit and tax collections. 

 

Bhanumurthy said that even if the government retains a particular deficit level, "bringing down debt level depends on further disaggregation of fiscal deficit, between revenue deficit and capital expenditure, which is very important".

 

In the past, the government's last-minute fiscal math was matched at the expense of cutting expenditure – particularly capital expenditure. Even in the previous financial year, the government had lowered the revised estimate for capital expenditure by nearly INR 1 trillion in order to stick to the fiscal deficit target. At any rate, the economist said, the government must maintain capital expenditure at 3% of GDP. 

 

In the post-COVID era, Prime Minister Narendra Modi's government has pressed the accelerator hard on capital expenditure to drive growth in the economy, with the allocation for this reaching INR 11.21 trillion this year, more than triple of what it was six years ago. 

 

"By and large, I must say that the Union government's fiscal consolidation is in the right direction," Bhanumurthy said. "Because we are seeing a very supportive fiscal consolidation, we are seeing a Goldilocks situation of higher GDP growth at 7.4% with low inflation" he said. "In fact, I think that GDP growth for FY26 is underestimation. When the final numbers come, we might see a slightly better GDP number, higher than 7.4%."

 

According to him, the higher growth was possible because of supportive fiscal measures that included "expenditure switching" without an overall expenditure compression, where allocation for capital expenditure was hiked while revenue deficit was contained. "...and that leads to better growth and that is exactly what is happening. So, the direction is right. And I also expect that the coming Budget will continue in that particular direction," Bhanumurthy said. As per calculations based on 2011-12 as the base year, he expects the economy to grow 7.0% in FY27.

 

The government could also be on track with its fiscal consolidation roadmap owing to robust tax buoyancy, though in FY26, that support is missing. The government's total tax collection in the first eight months of FY26 grew 3.3% as against a Budgeted growth of 10.8%. Data for FY25 showed the government had missed the revised aim by INR 582 billion. This means that for the government to meet its target this year, collections will have to grow 12.5%.

 

According to Bhanumurthy, while lower nominal GDP growth could have led to a slowdown in personal income tax collection, it is likely to improve in FY27. Even goods and services tax collection, which is seeing a bit of a lull, will revive in FY27 as consumption improves, he said.  

 

"Overall, I would expect that going forward, GST collections buoyancy should improve because when we say GST reforms, it is not GST reduction alone...there are many other aspects that are brought in, in terms of reporting, in terms of calculation, in terms of refund policies. All these reforms should improve the buoyancy going forward," he said. 

 

For personal income tax, the economist said that with reforms, formalisation of the economy, and rise of digital transactions, tax buoyancy below one should be ruled out. "Conservatively, realistically, it should be assumed somewhere close to 1.5," he said.

 

EXTERNAL ENVIRONMENT

The Indian economy has been dealing with multiple uncertainties on the external sector, particularly from the 50% import tariffs imposed by the US in August. Both New Delhi and Washington have been negotiating a trade deal, with India particularly looking at lower US tariffs on Indian goods, while the US has sought more access to the Indian market. However, nothing has been concluded so far, with the government missing multiple publicly announced deadlines. 

 

Bhanumurthy is of the view that the Indian economy has been absolutely resilient so far, even amid the external disturbances. He said the government has already taken various measures to address external issues and the same is not limited to the Budget-making process.

 

"Many external sector policies are already on board. And I guess, the Budget will only have to build on that," he said. "It (measures to deal with external risks) need not necessarily be part of the Budget. And maybe, the government might look at it because the implications of those tariffs might be visible in the fiscal numbers. So, to that extent, they might have to endogenise." 

 

Asked if the exchange rate should be used to deal with tariff uncertainties, the economist said it should be a combination of different policies and not the exchange rate alone, adding that a sharp depreciation or appreciation in the rupee is worrisome. "I am not a person to believe that even if the rupee goes to 100 (a dollar), I am not worried," he said. "I think we need to worry. We must worry. Any sharp depreciation or appreciation, both the ways, is a concern." 

 

The Indian rupee depreciated almost 5% against the dollar last year, logging its worst anual fall in three years and emerged as one of the worst performers among its Asian peers, amid the looming uncertainty related to the India-US trade deal.  End

 

US$1 = INR 90.22

 

Edited by Avishek Dutta

 

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