More Stories

Informist, Tuesday, Jan. 20, 2026

 

Please click here to read all liners published on this story

--Nomura Varma: FY27 Budget needs to focus on medium-term growth strategies
--CONTEXT: Nomura Chief India Economist Sonal Varma's comments in interview
--Nomura Varma: Expect FY27 capex at 3.2% of GDP, govt to maintain pace
--Nomura Varma: Expect 7.1% GDP growth FY27, can grow at 7% for next 5 yrs
--Nomura Varma: Important for govt to signal commitment to fiscal prudence
--Nomura Varma: Estimate 55?bt-to-GDP ratio for FY27 vs 56.1% FY26
--Nomura Varma: Estimate FY27 fiscal deficit at 4.2% vs 4.4% FY26

 

By Shubham Rana and Priyasmita Dutta

 

NEW DELHI – The government does not need to focus on counter-cyclical measures in the upcoming Budget for 2026-27 (Apr-Mar) and should instead focus on medium-term strategic policies, according to Sonal Varma, managing director and chief economist, India and Asia ex-Japan, at Nomura Singapore Ltd., which is part of the Nomura Group.

 

"From the Budget perspective, counter cyclical policy is not as much of a priority this time. A priority essentially is a more strategic policy response to the new global environment that we are in, where you have increased trade protectionism, and weaponisation of supply chains that has been ongoing," Varma told Informist in an interview. "If you don't have that much external demand to depend on, then how do you kick start and sustain domestic demand?"

 

Finance Minister Nirmala Sitharaman will present the Union Budget for FY27 in the Lok Sabha on Feb. 1. The Budget will be presented at a time of heightened global uncertainty caused by US tariffs and geopolitical conflicts.

 

According to Varma, the government has already taken counter-cyclical steps over the last one year to counter external headwinds and boost domestic demand. These steps include the income tax cut announced in the FY26 Budget, the goods and services tax rate cuts in September, and the front-loading of government capital expenditure. On the monetary policy side, too, 125 basis points of interest rate cuts and liquidity infusion by the Reserve Bank of India have helped boost domestic growth.  

 

Varma said the medium-term strategic policy should look at ways to integrate Indian exports with the global chain, and diversify exports to large markets like Europe. "All the free trade agreements that we have signed and are looking to sign is an important part of that strategy," she said. India's export sector currently faces heat from US'--India's top export destination's--50% tariffs. The two countries are actively engaged to secure a bilateral trade deal which could help lower the tariff impact. In the meanwhile, India has made an effort to expedite trade agreement negotiations with other countries.

 

The government should also consider expanding the production-linked incentive scheme to not only other sectors but also different levels of the same value chain like it did with electronic goods, Varma said. In 2020, the government had launched PLI scheme for large scale electronics manufacturing, followed by more targeted PLI schemes within the broad electronics sector like the electronics components manufacturing scheme. The government should also consider policies for strategic areas such as defence and rare earth minerals, the economist said.

 

"The Indian economy, therefore, is in a decent equilibrium. We do not need to give a large consumption stimulus, and we do not need to give massive investment stimulus," Varma said. "We can make some tweaks for consumption, and incentivise investment, but a significant change in policy direction is not needed."  

 

At the current juncture, the Indian economy can continue to grow at around 7% for the next five years, supported by all the reforms in the recent past, the Nomura economist said. For FY27, Nomura expects India's GDP to grow 7.1%.

 

Below are edited excerpts from the interview:

 

Q. What are the biggest challenges the economy is facing and how can the Budget address them?

A. The biggest unexpected event last year was India seeing US' 50% tariff. Of course, growth has turned out to be better than expected. In response to that shock, and partly for other reasons, a lot of counter cyclical policy responses have already been done in the last 12 months. On the fiscal side, the income tax cut and the GST cuts, plus the front-loaded capital expenditure; and on the monetary policy side, the rate cuts and liquidity. So, a lot has been done counter cyclically in response to the trade, tariff shock, and the domestic slowdown we had seen at the start of 2025.

 

From Budget perspective, counter-cyclical policy is not as much of a priority this time. A priority essentially is a more strategic policy response to the new global environment that we are in, where you have increased trade protectionism, and weaponisation of supply chains. If you don't have that much external demand to depend on, then how do you kick start and sustain domestic demand? The big picture pillar for this Budget is focusing more on the strategic policies, growth strategy for the medium term, and less about counter cyclical responses.

 

Q. Are you suggesting that there is a case for more domestic policies such as the PLI or creating an ecosystem so that we look inwards?

A. I'm not saying we look inward and not look externally. The strategic policy response that I'm talking about has multiple sub-pillars to it.

 

First, on the export sector, the strategy to integrate further into global value chain needs to continue without a doubt. The US is one of the biggest consumer markets but Europe as a whole is also a fairly big consumer market. So, all the free trade agreements that we have signed and are looking to sign is an important part of that strategy.

 

Within that, the production-linked incentive scheme is important and there is a case to expand the PLI to more sectors and for it to dynamically evolve over a period of time. We have, over time, expanded the list of sectors that come under the PLI. There are still labour-intensive sectors that can be brought under the PLI scheme, such as the toys industry.

 

By dynamically changing, I mean what we have seen in the case of the electronics strategy, where you have gone into different parts of the value chain in incentivising production. You want to create upstream value chain, you want to bring in component manufacturing not just assembly. Essentially, the incentives you give on PLI need to evolve over a period of time even within a specific sector to create local value chain. 

 

Second, the question is to what extent import dependence needs to be disincentivised and domestic production needs to be incentivised? There can be tweaks in customs duty in order to disincentivise excessive import of certain products and instead encourage domestic production of those products. Under this pillar, essentially it is the indirect tax policy which can be used to meet those objectives.

 

Third, this is more medium-term. The issue of rare earth supply chain disruption seen in the last six months or so signals India to be more self-sufficient in terms of products that are strategically important, and critical minerals would be one component of that. The time it takes from mining to processing to production is a multi-year process. But, if India needs to be more self-sufficient on these strategic minerals, then we need to have a game plan, a policy strategy.

 

Fourth, private investment has not gone up as much as expected for various reasons, despite government's capital expenditure push. With the government moving towards debt targeting, there is space to maintain the capital expenditure at 3.2% of GDP. If nominal GDP is growing at 9-10% going forward, capex budget can definitely grow at 3.2%. Maintaining the capex-to-GDP ratio would still be part of the strategy because we still need to push the infrastructure side. We can also provide tax incentives and accelerated depreciation benefits, specifically targeted for data centres and manufacturing to encourage frontloaded capital investment.

 

Fifth, defence is part of the strategic policy that we need to push in terms of modernisation, domestic procurement and research and development. Therefore, allocations towards defence budget become a part of the medium-term strategy.

 

There are a lot of reforms that the government can announce – providing a vision document - on what it plans to do going forward. Ultimately what we want is faster growth and more good job creation and achieving that goal boils down to these components.  

 

Q. What do you think is the realistic rate of growth for the next five years?

A. Closer to 7% is actually a realistic target, based on an objective observation of what is happening in the economy.

 

The policies that have been implemented have been right policies in terms of keeping the foundations stable and both monetary and fiscal policies have generally been quite prudent. The impact of all these reforms - rising infrastructure spending, digitalisation – all should support higher investment and productivity growth over time. If you put it all together, then not just in the next 12 months, but over the next five years, close to 7% growth is definitely doable.

 

Q. Do you think there is a disconnect between the economic growth in terms of numbers and actual ground-level growth?

A. The nominal growth slowdown is more consistent with the soft high frequency indicators seen during the first half of FY26. To some extent, a lower GDP deflator due to the double deflation issue, is also potentially leading to a higher real GDP growth. Once we shift to the new GDP methodology, then it should partly get addressed.

 

There has been this disconnect between the real GDP and what people feel and a lot of times, that is actually the nominal variables. For example, we have very high real interest rates on bank deposits, but who's putting money in bank deposits right now? So corporate earnings have come down on a nominal basis or salary growth has come down on a nominal basis, and people respond to these nominal variables.

 

What people have in mind is the pre-2010 period, with the exception of the Global Financial Crisis, where you did see a broad-based recovery. Private investments were picking up, a lot of foreign multinational companies were setting up shop in India, new jobs were getting created so that kind of broad-based investment growth, broad-based job creation, very strong salary growth is causing this disconnect. These are real issues.

 

As we go forward, we want to bring back some of those broad-based drivers of growth.

 

Q. Do you think that the government's measures to boost consumption demand has yielded the desired results? Will it continue to bank on capital expenditure in the near-term or at least in the next five years to be the primary driver of growth?

A. The strategy on direct taxes broadly has been simplification. Whether it is corporate tax or personal income tax, the objective has been to lower rates but remove exemptions and in the process, increase profits or disposable income.

 

The government actually managed to hit two targets with one stone which is reform direct taxation - people wanted more simplification, lesser forms - plus do the counter cyclical fiscal stimulus at a time where you wanted consumption to pick up. The tax reform needs to be seen in that context as well. This was anyway necessary. Not much is left to do on the direct tax front, except maybe some tweaks on exemptions and ultimately, the objective would be to move everyone to the new tax regime and phase out the old regime.

 

The government will maintain the pace of capital expenditure going forward. If you look at the last five years, the strategy has changed slightly. Initially, post pandemic, a lot of the focus was more on capital expenditure and not so much on consumption, and that was a period where we were ramping up central government capex from less than 2% to above 3% (of GDP). So capex has been growing multiple times the nominal GDP growth during this period. The tilt to consumption has only started last year, first with the personal income tax cuts, and then the GST cuts.

 

GST slab rationalisation was necessary, correcting the inverted duty structure was necessary and it was implemented when consumption was weak and when the tariff shock was hitting. Therefore, the timing of the GST reform was also to hit two targets with one stone.

 

The Indian economy therefore, is in a decent equilibrium. We do not need to give a large consumption stimulus, and we do not need to give massive investment stimulus. We can make some tweaks for consumption, and incentivise investment, but a significant change in policy direction is not needed. For FY27, we expect capex will be maintained at 3.2% of GDP.

 

As mentioned, there is no need for a massive counter cyclical policy response at this stage. This is actually the time to be focusing on more medium-term agenda.

 

Q. The government has given a debt path but we don't have a fiscal deficit path. Given the debt path allows the government a wriggle room to play with the deficit, what glide path do you think the government is going to assume for FY27? Is it going to be very safe or do you think they can go on a more expansionary fiscal stance?

A. From a signalling perspective, it is important that the government continues to signal that it is committed to fiscal prudence and that the shift in the fiscal target from deficit to debt is not an excuse to derail from fiscal prudence.

 

From markets' and from investors' standpoint, yes, there is a lot of uncertainty on what the debt to GDP path implies for the deficit path because depending on what your primary deficit, nominal GDP growth, and interest cost gap are, we can have different fiscal deficits as a share of GDP, while still meeting the debt to GDP targets.

 

From the government standpoint, given the uncertainty in the minds of investors and five years of fiscal commitment and meeting that fiscal commitment year after year, it is important that this signalling is sustained going forward.

 

Our forecast for FY27 is around 55% on the debt to GDP so that compares to 56.1% that was in FY26 Budget estimate. For fiscal deficit for FY26, we are expecting them to meet the 4.4% target so the undershoot on net tax revenue will be made up through expenditure consolidation in the remaining three to four months. For FY27, we are projecting a 4.2% fiscal deficit, so a slightly slower pace of consolidation compared to the last five years when the starting point was also much higher.

 

Q. The IMF in November said if US tariffs persist, the Indian government's debt to GDP path should be neutral in FY27 and maybe even pushed back by one financial year so that there is elbow room to respond to challenges. Do you think that the government should push back on the debt to GDP glide path so it can respond better?

A. In general, the US tariff impact has not been as bad as feared and it could partly be because only 55% of the export basket is under the US tariff. So, the 45% which are not under tariff and include electronics are actually growing at a very rapid pace and that's been a major success story.

 

We have also seen some evidence of export diversification. I would have expected diversification to take time but in some sectors, we are already seeing the benefits of diversification coming through. We have also taken some counter cyclical policy measures to offset the tariff impact.

 

Global growth has surprised on the positive side so India has also benefited on that count. In general, the economy has actually handled the tariff shock well and so I don't see any pressing need to pause or postpone the fiscal glide path or the new debt path because of these tariff concerns.

 

We don't know what kind of shocks will hit the global economy in the next 12 months or 24 months and therefore, it is important for macro policies to maintain some additional buffer for the rainy day. If the tariff impact has been managed relatively well then, I don't think we need to be using that buffer right now. The new debt path gives us that flexibility to still consolidate at a slower pace while getting our debt to GDP down. We should preserve that fiscal buffer and use it when it is really needed, not right now.  End

 

Edited by Vandana Hingorani

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.