New Delhi, Jan. 28 -- As India gears up for the Union Budget 2026-27, the government faces a growing challenge around how to reduce the fiscal deficit further without weakening the investment-led growth momentum that has supported the economy over the past two years, EY highlighted in its Economy Watch for January 2026.

India's fiscal deficit is budgeted at 4.4% of GDP in FY26, and policymakers are expected to signal a further consolidation to around 4.0% in FY27, EY said.

However, slower-than-expected nominal GDP growth and subdued tax collections have narrowed the room for manoeuvre.

The pressure is compounded by the fact that government capital expenditure has emerged as the main driver of growth, rising 28.2% during April-November ...