Under these circumstances, it would be interesting to see how the budget shapes up. There is the evident need to match fiscal prudence with expenditure allocations against the revenue that gets linked to the nominal GDP number.
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Prudence, not populism, is strengthening India’s growth path
It may be expected that the government will continue to focus on fiscal consolidation and hence, prudence will be the underlying theme of the budget. While there is some debate on whether the debt to GDP ratio should be targeted or the fiscal deficit ratio, at the end of the day the borrowing programme will be important from the point of view of the market. Hence the fiscal deficit ratio will be targeted for sure and is likely to be the starting point of the budget.
This will set the tone for the overall size of the budget as well as the expenditure outlays on both revenue and capital accounts. We may expect the government to lower the fiscal deficit ratio by 0.2-0.3% of GDP from the revised figure for FY26. For the current year, it was targeted at 4.4% and it needs to be seen if there would be any slippage on account of the GST reforms implemented in September.
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How recent Indian Budgets have prioritised fiscal prudence over populism
Post Covid it has been seen the budgetary allocations have been dovetailed towards growth and a delicate balance has been struck between social welfare and capex. The former is essential while the latter provides the kickstart to the economy. This is important because private sector investment has been lagging for various reasons.
This has meant that the government had to take the lead in investment which was done through the capex outlays. A good part was also allocated to the states based on certain performance parameters, thus ensuring that from the government side, there was continued focus on investment.
The private sector investment has been slow as there was surplus capacity which did not provide incentive for fresh investment in some sectors. Hence, investment was not broad based. However, with the income tax relief provided by the government in FY26 as well as the GST reforms announced in the festival season, it is expected that demand has picked up even in the consumer goods side which will lead to a virtuous cycle of higher investment and growth. Therefore the increase in capex is likely to be moderate and be in the region of Rs 12-12.5 lakh crore for FY27.
In terms of social welfare, the government has already streamlined the approach with the announcement of the new employment guarantee programme. Such an approach can be expected on other programmes too to ensure there is better utilisation of funds with the states also participating in such schemes. Some schemes like the free food programme would continue to be funded by the government as was promised last year and the focus would be more on targeting such expenditure effectively. On the whole it may be expected that the welfare programme outlays will be within the boundaries laid down by the fiscal deficit ratio that is targeted.
Budget & linkage to India’s rising economic strength, manufacturing build-out, and global positioning
India will continue to be the fastest growing large economy in the years to come and the role of fiscal policy is significant. It is not just from the point of view of the capex which is infrastructure oriented, but also manufacturing. Given our global aspiration of making the country a part of global supply chains and furthering the case of the nation’s strength as a global capability centre, ease of doing business is important. This is something which will be focused on in the budget in terms of administrative reforms.
The labour reforms announced some time back were pragmatic. The Budget is expected to strengthen the manufacturing sector with more allocations for the PLI scheme. They have worked very well in mobile phones, solar panels among others. A similar scheme for MSMEs could be on the cards as this segment has also been buffeted by the tariff issue as exports have been affected to the USA. Relief to this sector can also be high on the agenda of the government.
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Budget 2026 expectations around similar direction
With the tax reforms already in place in FY26, it can be expected that the budget will be focused more on expenditure management. It is also true that the lower growth in nominal GDP will put pressure on the government when it comes to projecting tax revenue which gets benchmarked with this variable. Inflation is expected to be low even next year, though higher than the 2% expected in FY26. Therefore, tax revenue growth will be constrained to this extent. However, the non-tax revenue component especially in the area of asset monetization and disinvestment could be more significant this year. There have been some signals sent that the focus would be more on the government gradually divesting from some companies.
Hence, we can expect more of continuity in ideology and numbers in this Budget. It is unlikely that there will be any changes in the income tax or corporate tax structures. But the possibility of revisiting the customs tariff structures is high given that this may be necessitated when any deal with the USA is being negotiated. As the external environment from the point of view of tariffs is still unclear, it would be preferred to walk the road of prudence at this stage and probably bring in any measures during the course of the year, if warranted.