Union Budget 2026 | Hike capex in defence, advanced tech sectors; target fiscal deficit of 4%, says EY

New Delhi: The Budget should look at increasing the share of capex in total government expenditure and such spendings should be directed towards advanced technology sectors such as AI, GenAI, space, robotics and advanced infrastructure, EY Economy Watch said on Wednesday.

It said that the scope for additional tax reforms in personal income tax and GST may now be limited.

In spite of the revenue shortfall in FY26 compared to the budget estimates, EY expects that the fiscal deficit target of 4.4 per cent of GDP may still be achieved.

"Going forward, it may be desirable to continue on the path of fiscal consolidation and target a fiscal deficit to GDP ratio of 4 per cent in FY27," the EY report said.

It further said that fiscal consolidation needs to be continued to create space for private investment by expanding their access to the investible surplus in the economy.

Continued high growth in the expansion of physical infrastructure may be constrained, but there is considerable scope for increasing defense capital expenditure, the EY report said, adding public infrastructure is also critically needed in the advanced technologies segments where initial costs are large.

Private sector participation in sectors such as AI, GenAI, space and robotics and advanced health infrastructure can be encouraged by sharing with them commonly available public sector infrastructure in these sectors.

"The share of capital expenditure in total government expenditure may be increased further but changing its composition in favour of advanced technology sectors such as AI, GenAI, space, robotics and advanced infrastructure as also defense capital expenditure is desirable," EY Economy Watch report said.

EY estimates real GDP growth for 2026-27 at 6.5 per cent and nominal GDP growth at about 9.5 per cent. The GoI's capital expenditure growth in FY27 may be kept at least equal to nominal GDP growth, EY said.

External sector uncertainty is being correctly addressed through diversification of India's export destinations by expanding the list of countries with whom India has trade and investment agreements, the report added.