Finance minister Nirmala Sitharaman proposed a tight Budget for FY26, which enabled her to stick to the fiscal consolidation path, and seemed putting up with economic growth of 6-6.5% for the country for the medium term. Yet, a decent consumption stimulus was unveiled in the form of Rs 1 lakh crore tax giveaways to the “middle class” to impart a short-term push to the faltering growth, and address a growing clamour for relief from large sections facing an income crisis.
The finance minister is obviously hoping that the money she has put in the hands of the people will cause consumption to rise again and accelerate economic growth.
This, however, came with an apparent plateauing of budgetary capital expenditure growth, and might also reflect an erosion of the capacity among public-sector entities to implement projects at the furious pace they used to, in the immediate post-pandemic years. Private-sector players including MSMEs has to take the lead in fixed asset creation as public capex, being just 10-11% of the gross domestic product (GDP), cannot invigorate the economy for long.
With the size of the Union Budget FY26 pegged at 14.2% of the GDP, compared with 14.6% in FY25, and the recent peak of 16.1% in FY22, fiscal deficit estimate for the current fiscal year is revised to 4.8%, marginally lower than the initial projection of 4.9%. It is seen to reduce to 4.4% in the next financial year. Gross market borrowings in the next fiscal year will grow 6% on year to Rs 14.82 lakh crore, a rate lower than the nominal GDP growth estimated of 10.1%.
The government chose to move to debt reduction as the core fiscal strategy, foregoing rigid annual deficit targets, and set an aim to reduce the ratio of the central-government debt to GDP to 50% by FY31, from the FY25 level of 57%. This compares with a goal of 40% set by an expert panel earlier. The shift in fiscal strategy could provide considerable operational flexibility for the Centre through Modi 3.0 government’s tenure. While high economic growth and resultant revenue buoyancy are potential upsides to the plan, the inadequacy of these could throw up as risks. To be sure, the three scenarios of nominal GDP growth rates – 10%, 10.5% and 11% – foreseen in the fiscal policy statement seem realistic.
The Budget was vocal about “transformative reforms” to be undertaken to bolster the economy’s growth potential, and the Viksit Bharat vision for 2047. It identified six domains in particular for the reforms– taxation, power sector, urban development, mining, financial sector, and regulatory reforms.
The concrete steps to be taken include a Bill that will cut the size and complexity of the Income-Tax Act, 1961 to be introduced next week, a panel to review the non-financial sector regulations with a view to easing them, and a mechanism under the Financial Stability and Development Council to evaluate impact of the current financial regulations. A light-touch regulatory framework based on principles of trust would unleash productivity and employment, the minister said, endorsing the Economic Survey observations.
While the capex and some of the key welfare schemes like the one for rural employment guarantee were required to be regulated for fiscal consolidation, the tax revenue buoyancy for FY26 is projected at a realistic 1.1. This is the same level as in FY25, but significantly lower than 1.4 seen in FY24. Despite the I-T relief, the reliance on personal income tax for revenue as the principal revenue source continues, with its share in total receipts (including borrowings) forecast to be 22% in FY26, much higher than corporation tax (17%).
The Budget expects the Reserve Bank of India (RBI) to transfer a tidy sum comparable to the current year’s dividend of Rs 2.1 lakh crore to the exchequer in FY26 too. Moody’s Ratings said: “…In particular, announced tax relief measures have constrained the growth of revenue receipts, which will rise at its slowest pace since 2022-23; as such, falling expenditure as a share of GDP has borne the brunt of the projected narrowing of the fiscal deficit..”
A subtle shift was visible in the Budget from the investment-led growth strategy, which the Narendra Modi regime has remained wedded to. The multi-pronged plan would now be to “accelerate growth, secure inclusive development, invigorate private sector investments, uplift household sentiments, and enhance spending power of India’s rising middle class,” the finance minister said.
Among the clutch of measures that are designed to bolster economic productivity are an Rs 10,000 crore outlay in FY26 for a Rs 1 lakh crore urban challenge fund, extension of the incentives for power sector reforms to state governments via 0.5% extra borrowing limit, Rs 20,000 crore outlay under Nuclear Energy Mission for research & development on small modular reactors, a doubling of the credit guarantee cover for MSMEs to Rs 10 crore. Also, another “fund of funds” of Rs 10,000 crore will be set up for start-ups, and the benefits will be available for units to be set up by FY31. Support for domestic ship-building will be enhanced, and public-private-partnership projects in infrastructure will be monitored and promoted more closely by creating 3-year sector-specific pipelines.
Customs tariffs have been tweaked for a clutch of products, in a move that will bring down the average tariff below 17%, and aid domestic value addition. The capping of import tariffs at 70% could be precursor to more steps, including bilateral ones, that the country might require to take, while it negotiates the disputes with the Trump administration.
The Budget was silent on India’s approach to the OECD-anchored two-pillar remedy for global tax avoidance and affirming national rights, even though US’s withdrawal from a 2021 deal in this regard has raised major uncertainties. India, with its vast consumer market and wide digital user base, has high stakes in securing legitimate taxing rights on digital service providers from abroad.
Sitharaman, however, announced India will revamp its 2015 Model Bilateral Investment Treaty (BIT) to make it more investor-friendly. This signals the government’s decision to be in conformity with global investment norms, and comes in the backdrop of the revocation of 77 out of 80-plus BITs by 2016, following adverse arbitration rulings in high-profile cases such as Cairn Energy and Vodafone.