The brokerage expects the gross fiscal deficit to edge down to 4.3% of GDP in FY27 from 4.4% in FY26, marking what it calls a historic shift towards using debt-to-GDP as the primary fiscal anchor. The budget, it said, is likely to be framed around a nominal GDP growth assumption of about 10.1%, providing limited headroom to support growth without undermining consolidation.
Capex over populism
Motilal Oswal does not expect any populist measures or direct tax changes in the coming budget, arguing that the government’s focus remains firmly on medium-term credibility. Capital expenditure is forecast to rise 10.3% year on year to Rs 12.4 trillion in FY27, holding steady at around 3.1% of GDP, even as revenue spending growth moderates.Defence and allied industries are expected to dominate the capex push. The brokerage notes that the Defence Acquisition Council has already approved capital acquisition proposals worth Rs 790 billion in its winter session, taking FY26 year-to-date approvals to about Rs 3.3 trillion, nearly double the budgeted defence capital outlay for the year. Other sectors expected to see continued policy support include nuclear energy, electronics manufacturing, power, pharmaceuticals and strategic investments linked to critical minerals.
Beyond traditional infrastructure, the brokerage highlighted digital technologies embedded in agriculture, healthcare and social sectors, as well as pharmaceuticals leveraging India’s research and development base, as emerging priorities likely to feature in budget allocations.
RBI dividends do the heavy lifting
On the revenue side, Motilal Oswal expects steady but unspectacular growth. Direct taxes are projected to broadly track nominal GDP growth, reaching Rs 25.7 trillion in FY27, while indirect taxes are likely to grow more slowly, with GST collections remaining muted.Non-tax revenues are once again expected to play a crucial role. The brokerage estimates that dividends from the RBI and public sector undertakings could rise to Rs 3.8 trillion in FY27, supported by heavy RBI dollar sales that have boosted central bank profitability. Increased reliance on the RBI dividend will be key to meeting the fiscal deficit target, the report said.
Borrowing pressure keeps yields elevated
Despite the marginal improvement in the headline deficit, borrowing requirements are set to remain high. Motilal Oswal forecasts the Centre’s gross market borrowings at about Rs 16.5 trillion in FY27, with net borrowings of roughly Rs 11.9 trillion. State governments are expected to add another Rs 13.2 trillion in gross borrowing, taking aggregate Centre plus state gross borrowing close to Rs 29.7 trillion.
That heavy supply, combined with subdued demand from banks, insurers and foreign investors, is likely to limit any sustained fall in bond yields. The brokerage expects the 10-year government bond yield to trade in a 6.5% to 6.7% range through FY27, noting that even substantial rate cuts have so far failed to meaningfully ease yields due to demand-supply imbalances and the postponement of India’s inclusion in the Bloomberg Global Aggregate Index.
A test for the capex trade
The budget arrives at a delicate moment for markets. After a sharp front-loading of government capital spending earlier in FY26, execution has normalised, valuations across capex-linked sectors have reset, and investor enthusiasm for the trade has cooled. Against that backdrop, Motilal Oswal sees Budget 2026 as a reaffirmation of strategy rather than a pivot.
For equity investors, the brokerage’s preferred themes remain defence and allied industries, infrastructure-linked manufacturing, power, electronics, pharmaceuticals and critical minerals. For bond markets, the outlook is more restrained. Fiscal consolidation may continue at the margin, but elevated borrowing is likely to keep yields range-bound.
In that sense, the FY27 budget is shaping up less as a short-term market catalyst and more as a test of policy credibility, one that will determine whether India’s capex-led growth narrative can be sustained in a slower, more selective phase.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)