New Delhi

With the Union Budget for FY27 scheduled for Sunday, expectations are tamed even as markets remain alert to the possibility of selective positive surprises, according to a pre-Budget note by Union Bank of India (UBI).

The report notes that while the Government does not wait for the Budget to announce key reforms, the Budget continues to be a crucial policy document, especially at a time when most major policy announcements are already under execution.

UBI expects fiscal consolidation to continue in FY27, albeit at a slower pace. The fiscal deficit is projected at 4.2-4.4 per cent of GDP, with the bank stating, "We see fiscal consolidation to continue in FY27, albeit at slower pace, to 4.2% of GDP, in order to preserve policy space in an uncertain world & ahead of Pay Commission implementation in FY28."

The report highlights a likely transition towards a debt-to-GDP targeting framework, noting that the Centre aims to transition to a debt management approach from FY27 with an endeavour to reduce debt to GDP to around 50+-1 per cent by FY31.

Despite pressures on revenues from earlier tax cuts and the discontinuation of the GST compensation cess from February 1, 2026, policy priority is expected to remain firmly on capital expenditure. UBI projects FY27 capital expenditure at Rs 12.4 lakh crore, or about 3.2 per cent of GDP, with defence, roads and railways remaining key focus areas.

The report states that capex push and revex rationalisation are expected to be the main drivers of fiscal consolidation in FY27.

On market borrowings, UBI sees room for lower-than-expected numbers. While market consensus pegs FY27 gross borrowings in the range of Rs 15.5-16.5 lakh crore, the bank's baseline estimate is at the lower end.

"Despite low probability of an 'optimistic' scenario, we propagate the same," the report says, adding that there is space to show lower gross and net borrowing numbers of around Rs 15.5 lakh crore and Rs 10.5 lakh crore, respectively.

The 16th Finance Commission report, to be tabled along with the Budget, is expected to be closely watched. While market expectations point to minor changes in tax devolution, the report flags the possibility of more substantive reform signals.

UBI notes "macro urgency to have a handle on states' finances," and says the Commission may lay down a "fiscal roadmap for states targeting fiscal deficit to come down to sub-3% of GSDP in a prescribed time period."

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Beyond fiscal arithmetic, the report says reform announcements will be a key focus of the Budget. These include measures to make bank deposits more attractive, steps to "lay the red carpet for foreign investors," promotion of sectors like defence amid geopolitical uncertainty, and customs duty rationalisation to boost manufacturing and ease of doing business.

Summing up, UBI notes that while the Finance Minister is known for being conservative & credible, the upcoming Budget still carries the possibility of selective favourable surprises for markets and the macro outlook.