Union Budget FY27: These 6 calls could end the fiscal drag, Nuvama says

India’s economy may be bottoming out, but without fresh policy support the recovery risks losing steam. In its FY27 Budget preview, Nuvama Institutional Equities lays out six expectations that frame how Finance Minister Nirmala Sitharaman could try to revive growth, without blowing a hole in the fiscal math. From halting fiscal consolidation and lifting capex to betting on disinvestment, deregulation and targeted sector pushes, the brokerage argues that FY27 could mark the end of years of fiscal drag.

The Union Budget is likely to mark a turning point from years of fiscal tightening, but the shift may not be strong enough to change market positioning meaningfully, according to Nuvama Institutional Equities. While higher development spending and capex are welcome, the brokerage said they may still fall short of arresting the ongoing earnings downgrade cycle, as margins are poised for mean reversion and external headwinds remain. As a result, Nuvama continues to maintain a defensive bias, preferring telecom, internet, IT, consumer, cement and chemicals, while staying underweight on BFSI, autos, industrials and power.

The brokerage said the economy is “bottoming out”, but growth impulses remain weak despite last year’s tax cuts, making complementary fiscal support critical as global uncertainties linger. Nuvama expects the Centre to retain the gross fiscal deficit (GFD) target at 4.4% of GDP in FY27, unchanged from FY26, thereby ending the negative fiscal impulse of recent years, even as it cautioned that a modest fiscal push may not be sufficient to drive a sharp top-line recovery for India Inc.

1) Fiscal consolidation pauses

Nuvama expects the finance minister to “abstain from further fiscal consolidation” in FY27, keeping the GFD at 4.4% of GDP. With five years of tightening behind it, the brokerage says fiscal drag should fade, turning the fiscal impulse neutral from negative. The removal of the GST compensation cess alone could add about 0.2% of GDP in support to the economy.

2) Tax revenue to rebound modestly

After a weak FY26, gross tax revenue is projected to grow about 8% year-on-year in FY27, aided by a low base and a moderate acceleration in nominal GDP growth. Adjusted for the removal of the cess, tax revenue growth could be closer to 11%, even as overall collections continue to trail nominal GDP due to tax cuts.

3) Spending growth accelerates, led by capex

With no further consolidation, total government expenditure could rise about 10% in FY27, up from roughly 5% in FY26, Nuvama estimates. Capital expenditure is expected to expand about 13% year-on-year to around Rs 12 trillion, while development-oriented spending, on areas such as health, education and rural transfers, could grow 15% versus about 7% in FY26.

4) Disinvestment and RBI dividends do more heavy lifting

To create room for higher spending, Nuvama expects the government to step up non-tax revenues, targeting disinvestment receipts of about Rs 1 trillion, potentially through stake sales including IDBI Bank. Sustained dividend transfers from the Reserve Bank of India, following large foreign-exchange interventions, are also seen supporting the revenue pool.

5) Growth push beyond the balance sheet

Beyond the fiscal math, the brokerage expects measures such as deregulation, credit-guarantee schemes for microfinance institutions, and efforts to nudge public-sector undertakings to raise capex. PSU capex as a share of GDP has halved from pre-Covid levels, and Nuvama argues these entities, given stronger balance sheets, need to do more to crowd in private investment.

6) Selective sector focus, but no big market kicker

Sectors such as semiconductors, AI and robotics, defence, railways and manufacturing could see policy attention, while agriculture and rural-focused schemes may get a lift to support consumption. Still, from a market standpoint, Nuvama cautions that the Budget is “unlikely to decisively support a particular sector” and may not be enough to arrest the earnings downgrade cycle, as margin mean reversion and external headwinds persist.

Overall, the FY27 Budget is likely to be “somewhat growth supportive—a welcome change,” Nuvama said, but not a full-blown stimulus. Without a sharper top-line recovery, the brokerage maintains a defensive bias on markets, even as fiscal drag finally begins to ease.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)