A recent report from HSBC indicated that the upcoming Union Budget for 2026-27 is expected to prominently feature a series of reforms, noting that the government seems inclined toward further changes following a number of announcements in recent months.

The central government is set to unveil its budget on February 1, with the RBI’s policy meeting occurring shortly after on February 6.

“The government is likely to concentrate on two key areas during this period – responsible spending and reforms,” the report stated.

The report anticipates that the government will achieve its fiscal deficit target of 4.4 percent of GDP for FY26. The decline in revenues resulting from tax rate cuts is expected to be partially offset by strong dividends from the RBI and PSUs, as well as reduced current expenditures.

“The pruning of programs is anticipated to assist the government in reducing its expenditures in FY27, leading us to predict a fiscal deficit of 4.2% of GDP,” stated the HSBC report.

The report also predicts that the net borrowing figure will remain unchanged at Rs 11.5 lakh crore in FY27. A substantial redemption bill (even with some switches considered) would push gross borrowing up to Rs 16 lakh crore.

“However, the increase in borrowing will still fall short of the rate of nominal GDP growth, rendering it manageable. The fiscal impact is expected to be close to neutral despite ongoing fiscal consolidation, aided by a smaller level of consolidation and higher receipts from RBI dividends once again,” the report emphasized.

This level of consolidation is progressing adequately to achieve the central government’s public debt objective for FY31.

Nonetheless, state governments might experience an increase in their public debt ratios in the coming years, as they lack a comparable path to consolidation.

Fortunately, even with states accounted for, overall gross market borrowing is projected to grow slightly less than the increase in nominal GDP (in contrast to FY26, where borrowing growth significantly outpaced NGDP), according to the report.

Domestically, “we anticipate that the deregulation initiative by both state and central governments will persist, manufacturing incentives for smaller enterprises will continue, and capital expenditure diversification will favor loans for state projects, along with some streamlining of subsidy and centrally-sponsored programs.”

“On the international side, we foresee a substantial effort to streamline customs duties, ongoing reduction of non-tariff barriers, and increased openness to foreign direct investment across various sectors,” stated the report.