Focus on fiscal stability

Budget 2026-27 faced an external situation that is still challenging despite US President Donald Trump’s decision to impose reciprocal tariffs of 18% and remove the Russian oil tariff. The Budget has been built on the advantages generated by rationalised goods and services tax (GST) and income tax rates. It focuses on fiscal stabilisation and Viksit Bharat 2047. The attempt at fiscal stabilisation seems reasonable, while more needs to be done on Viksit Bharat.

Keeping growth concerns in mind, expenditure compression is gradual in this Budget, with the fiscal deficit going down from 4.4% to 4.3%. However, we need to see the glide path of debt-to-GDP by FY31, as the government will be facing increased outflows in the next few years due to the implementation of the Pay Commission recommendations.

The Budget attempts to ensure that expenditure is restricted to its ability to raise revenues. Aspirations of revenue collections next year will be dependent on the nominal growth rate. Buoyancy assumed in collection seems to be in trend with the past, but nominal growth will play a critical role in determining buoyancy. Without 3-4% inflation, price, income, and growth assumptions may not materialise. The government must attempt to increase revenues to meet the requirements of expenditure through disinvestment and asset monetisation, bringing more people under the tax net with technology, applying GST to professions that are excluded, and taxing agricultural income above a threshold. The tax-to-GDP ratio combined with the states must be more than at least 20%.

The Budget has addressed the concerns of micro, small, and medium enterprises (MSMEs). But a subset of MSME classification—unincorporated enterprises (UIEs)—has fallen off the radar. UIEs constitute 10% of GDP, employ 13 crore people, and have a 40% share in MSME exports. Their capital base was destroyed by demonetisation, GST, and Covid-19. We need a mechanism by which their capital requirements are taken care of without collateral and guaranteed by the government. Their vibrancy will enable an increase in income, contribution to savings, and the eventual investment in the economy. UIEs’ rising incomes are an avenue for increasing savings in the economy as well besides being an incubator for entrepreneurship.

The Budget has not addressed how to prepare industry to make the most out of the free trade agreements (FTAs) that have been signed or are being negotiated. Our exporters will face many non-trade barriers. To help them to overcome these, we need to upgrade our standards as well as prepare our industry to face them abroad through education and the creation of additional testing infrastructure so that our industry is ready for the FTAs. A financing mechanism subsidised by the government should be established to enable industries to overcome the costs associated with the Carbon Border Adjustment Mechanism (CBAM). The operation of renewable energy certificates and emissions trading systems (ETS) must be overhauled for greater efficiency. The government should examine if

the coal cess can be reformulated into a formal carbon tax or ETS-linked levy so that it can be used to offset CBAM charges.

The Budget has addressed advanced materials’ manufacturing and labour-intensive industries with proposals to establish infrastructure, fiscal outlay, and taxation. A focus on hydrogen, chips, artificial intelligence, and biopharma prepares us to explore new horizons of industrialisation. However, a few problems persist. Spending on research and development (R&D) is still confined to the public sector. Despite the planned Rs 1 crore expenditure for R&D, not much seems to have happened on the ground. Investments by industries seem to be only towards expanding existing capacities, except those in new-age industries like semiconductors and manufacturing (which the government had to encourage through huge subsidies).

Tariff protection to industries does not help them in joining global value chains. As the Economic Survey points out, upstream industries seem to be getting more protection, possibly for a different reason. The monopolistic nature of our industries, especially in steel, cement, etc., needs to be addressed so that new entrants do not face a wall. Gross fixed capital formation in manufacturing has declined from 21% to 16%, and the aspiration of increasing the share of manufacturing in GDP to 25% remains somewhat difficult at this juncture. Revamping Skill Development Councils and the Skill Development Corporation for skilled personnel is required, as these have not delivered to their potential.

Vocational training and internship also need attention, as the outlay has not been utilised proportionately. A lot of thought has gone into having academic and vocational streams in schools. We must accelerate efforts to significantly improve the establishment of vocational streams. It will not only enable the demographic dividend to yield benefits but also reduce youth unemployment. Countries like Germany offered to help us in this regard. The vision of revamping industrial training institutes and putting the industry in charge seems difficult to actualise, and it must be realised.

The Budget is also a vehicle to indicate the government’s intentions. Reforms are a part of it. Reforms in land acquisition fell prey to politics despite the best intentions, and so did agricultural reforms. States should be incentivised purposefully to take them forward. Surveys conducted with modern equipment to clearly delineate field areas and establish their ownership will go a long way in creating certainty for economic agents.

The Economic Survey has clearly indicated that even a potential growth of 7% is contingent on achieving a 7.6% growth in capital stock and a total factor productivity (TFP) growth of 1.9%. TFP growth during 2023-24, according to the capital, labour, energy, materials, and services (KLEMS) data, was only 0.6%, with manufacturing seeing negative growth. Measures to enhance productivity such as parks, tax holidays, and corridors cover certain sectors only. A broader outlook for productivity development is desirable.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.