India Budget Basics: If the calculations puzzle you, this is how the budget maths really works

Union Budget 2026: Finance Minister Nirmala Sitharaman is going to present India’s budget in February. The Union Budget will include projections for the coming financial year, that is the calculations about income, spending and borrowings, the key amounts for the government.

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Now, let’s see how does India’s budget math work? What are the key calculations that go into the making of the Union Budget? The process of India’s budget-making is a forward-looking exercise, since it is for the coming financial year, and is based on several assumptions. The budget in effect is a matter of several projected numbers. India follows April to March fiscal year calendar and the Union Budget 2026 for fiscal year 2027 will be presented in February.

Nominal GDP, the cornerstone of India’s budget making

The starting point for any Union Budget is the estimate for next year’s nominal GDP, because every major decision in the India Budget depends on it. The finance minister has to make a careful assumption about how much the economy will grow in the coming fiscal year. This single estimate shapes all other Budget calculations, including how much the government expects to earn, how much it plans to spend, and how much it may need to borrow. Most of the key figures in the Budget are worked out as a share of this projected nominal GDP.

The first step in projecting next year’s nominal GDP is estimating the nominal GDP for the ongoing financial year. This happens through the process called the first advance estimate. Released in January by the government, this estimate is based on quarterly estimates available for the previous year used as the benchmark year which are extrapolated using the relevant indicators reflecting the performance of different sectors.

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India’s economy kept up a strong pace, growing 8.2% in real GDP in the second quarter of FY2025-26. This is the quickest growth in six quarters. The rise came mainly from solid performance in manufacturing, construction and services, taking overall growth in the first half of the year to 8%.The Reserve Bank of India’s rate-setting Monetary Policy Committee (MPC) on December 5 upwardly revised India’s GDP forecast for FY2025-26 to 7.3% from earlier estimate of 6.8%.

In January, the National Statistical Office is scheduled to release the first advance estimate fr India’s GDO growth in this fiscal year. It will show expected nominal GDP growth. On the basis of this number and other factors such as inflation, the finance minister will project in the budget the nominal GDP growth for the next financial year that will start from April 1, 2026. Other budget numbers will be percentages of this projected nominal GDP.

For the purposes of budget-making, nominal GDP is considered instead of the real GDP since the real GDP is derived from the nominal GDP after subtracting the rate of inflation.

Union Budget 2026: Projecting the other key numbers

Once the government estimates nominal GDP growth, it then works out how much tax it expects to collect in the nex fiancial year and it will be presented in India’s Budget. These tax projections are linked to GDP growth through something called tax buoyancy. A tax buoyancy of one means that if GDP rises by one percent, tax revenue will also rise by one percent. If tax buoyancy is higher than one, tax collections grow faster than GDP. This gives the government more room in the Budget to spend on programmes or to narrow the fiscal deficit.

Once it knows how much revenue it will collect, it projects the expenditure by determining allocations for different ministries, departments and schemes. It then projects the fiscal deficit target for the next year as a percentage of nominal GDP. The fiscal deficit, the gap between income and expenditure which is filled with borrowings, disinvestment, etc, determines the level of borrowings by the government. A higher projection of the GDP growth can bring down the fiscal deficit target or allow the government to borrow more to fund its expenditure.

There are projections in the budget which do not derive from the nominal GDP growth estimate. The most important of these is the crude oil price in the next financial year. India is heavily dependent on imports to meet nearly 88 per cent of its crude oil needs. The price of crude oil has a bearing on fiscal deficit, since it can deflate or inflate the country’s import bill and thus decides the Current Account Deficit. The government’s budget estimate of subsidies is dependent on the price of crude oil in the next financial year because fertiliser and cooking gas subsidies, nearly half of the total subsidies in the budget, is affected by crude oil prices.

Clearly, the budget is based on a set of projected numbers which get revised several times as more and better data comes in. The finance minister has to be careful in making projections of key numbers in the budget, such as GDP growth. Often, the numbers projected in the budget are contested by experts, which erodes the credibility of the budget. Since the budget is based on estimates of how well the economy will perform in the next year, realistic projections are what makes the budget credible.