The Budget for 2026–27 bears clear evidence of a widening resource gap for the government, even as it remains ambitious in positioning the State as the principal exogenous driver of growth.
In the short to medium term, the government will continue to see itself as the architect of structural reform and an enabler of job creation, but the constraints on public spending are becoming more apparent.
Presenting her ninth consecutive Budget in Parliament on Sunday, Finance Minister Nirmala Sitharaman soft-pedalled on fiscal consolidation as tax revenues and buoyancy faltered, yet maintained that her foremost “kartavya” (duty) was to accelerate and sustain economic growth.
The Budget, however, fell short of addressing the immediate concern of persistent capital outflows — a reflection of extraordinary external headwinds and a key factor behind the rupee’s undervaluation. The Economic Survey 2025–26 had flagged this vulnerability, warning of the premium India must pay to attract foreign capital given its low domestic savings rate, and argued strongly for policies that could deliver “sustained external surpluses”.
Sitharaman broadly echoed the Survey’s prescriptions, announcing new schemes and reinforcing existing ones to revive India’s sluggish manufacturing base, with a focus on “seven strategic and frontier sectors”.
These include textiles, capital goods, semiconductors, rare earths, electronic components and biopharma, with additional budgetary allocations for the latter two.
Empowering Small Businesses
Structural diversification was also emphasised through plans to rejuvenate 200 “legacy industrial clusters” with infrastructure and technology support, alongside the creation of “Champion SMEs”. Support for small and medium enterprises will extend beyond concessional credit to include direct equity funding.
Combined with a renewed thrust on services, these measures are intended to boost employment and tap the productivity dividend from India’s youthful workforce.
Another notable initiative is the plan to develop Tier II and Tier III cities as growth engines, with an allocation of ₹5,000 crore each over five years. This comes against projections that India’s urban population could touch 600 million by 2035, requiring infrastructure investments of nearly ₹60 lakh crore.
On the fiscal front, the deficit for FY27 is pegged at 4.3% of GDP, marginally lower than the 4.4% targeted for the current year. The government has unveiled a medium-term fiscal strategy aimed at gradually reducing the Centre’s debt-to-GDP ratio to 50% by FY31. Even so, the Budget’s size relative to GDP has been compressed.
Gross market borrowing for FY27 is projected at ₹17.2 lakh crore, slightly above market expectations, raising the possibility of a modest uptick in government bond yields.
The quality of consolidation also shows some strain. The revenue deficit is projected at 1.5% of GDP in both FY26 and FY27. The interest burden, a key indicator of fiscal flexibility, is set to rise, with interest payments expected to absorb 49% of net tax receipts in FY27, up from 47.6% in FY26 (RE).
Moody’s Ratings described the Budget as “tactical” rather than transformative, signalling limited near-term upside for India’s sovereign credit profile.
Budget arithmetic remains cautious. Tax buoyancy for FY27 is projected at 0.8x, based on nominal GDP growth of 10%, down from a revised 0.9x for FY26 and well below the post-pandemic highs. This reflects not only last year’s substantial direct and indirect tax cuts, but also a waning impact of incremental “tax effort”.
On the expenditure side, risks persist. Subsidy spending is budgeted to fall to 1% of GDP from 1.2% this year, an assumption that appears to hinge on politically sensitive revisions to urea prices, last adjusted in 2018. Capital expenditure is set to rise 9% to about ₹12 lakh crore, keeping it steady at 3.1% of GDP.
Revenue spending, including on social infrastructure, remains tightly controlled, though defence spending has risen from budgeted levels in the wake of Operation Sindoor.
The disinvestment and asset monetisation target of ₹80,000 crore for FY27 appears to factor in ₹35,000–40,000 crore from the strategic sale of IDBI Bank, with no other major transactions in sight.
Custom Duty Restraint
While a broad rationalisation of customs duties had been anticipated, the Budget opted for restraint. Instead, selective duty waivers have been announced for items such as life-saving drugs and specific capital goods.
Overall customs revenue growth is projected at just 5% in FY27, down from 10.8% in FY26 (RE), reflecting both tariff cuts and the growing impact of free trade agreements, including the recently concluded pact with the European Union.
The government appears to prefer tariff reduction through preferential trade routes, even as it acknowledges that high import duties can inflate export costs. It is also confident of concluding the long-delayed India–US bilateral trade agreement in early 2026.
The report of the Sixteenth Finance Commission, tabled alongside the Budget, retains the current tax devolution share for states, limiting additional transfer burdens on the Centre through FY31. While the discontinuation of revenue deficit grants may offer some fiscal relief, looming commitments — notably the Eighth Pay Commission — could significantly strain the Centre’s finances from FY28.
Finally, Sitharaman announced relief for minority shareholders by taxing buyback proceeds as capital gains rather than at marginal income tax rates. To prevent arbitrage, an additional buyback tax will apply to promoters, with effective rates of 22% for corporate promoters and 30% for others.