India’s Modi faces a tough task to shore up growth in the 2026-27 budget

Shivangi Acharya and Nikunj Ohri

NEW DELHI, Jan 27 (Reuters) – Indian Prime Minister Narendra Modi will try to bolster rapid economic growth and buffer the Asian nation from external shocks through domestic policy reforms in the latest budget on Sunday, as unprecedented global volatility weighs on the outlook.

Finance Minister Nirmala Sitharaman will present the Budget 2026-27 on February 1 at 0530 GMT.

India’s economy has so far weathered the punitive U.S. tariffs imposed by President Donald Trump, with government spending on infrastructure forecast for 7.4% growth for the year ending March 31 and income and consumption tax cuts that have boosted consumer spending.

However, it has cut revenues, limiting the government’s options to support the economy in the new budget.

“After announcing direct tax cuts and goods and services tax cuts in 2025-26, in our view there is not enough room to offer additional consumption stimulus in the 2026-27 budget,” Barclays economist Aastha Gudwani said.

Sitharaman, economists said, faces a tough task of restoring short- and long-term investor confidence, as uncertainty over New Delhi’s trade talks with Washington has unsettled financial markets and sent the rupee to a record low.

Foreign investors have continued to sell Indian stocks after record outflows in 2025 due to extended valuations, lower earnings and geopolitical concerns.

With limited capacity to increase spending, the government is likely to focus on simplifying regulations and emphasizing structural reforms to attract domestic and foreign investment, said Abhuti Sahay, head of India economic research at Standard Chartered.

Revenue constraints

The government is estimated to lose 1.5 trillion rupees in annual revenue due to the 2025 tax cuts, and economists expect Sitharaman to cut overall spending to meet this year’s fiscal deficit target of 4.4% of GDP.

Sitharaman has stabilized the bond market and won a much-anticipated rating upgrade from S&P Global Ratings with her predictable financial glide path.

Economists expect the latest budget to focus on bringing the federal government’s debt-to-GDP ratio down from 56% to 49%-51% by 2031, a metric closely watched by global investors.

Economists say the government is targeting a fiscal deficit of 4.2 percent of gross domestic product (GDP) this year, compared to 4.4 percent in 2026-27, and total debt is likely to rise from Rs 14.6 trillion to Rs 16 trillion to 16.8 trillion.

That would prevent Sitharaman from significantly increasing capital spending over the current year’s 11.2 trillion rupees, and keep government capital spending at about 3.1% of GDP, economists said.