By Sajjid Z Chinoy, Head of Asia Economics, JPMorgan
This year’s Budget was presented against an extraordinary global backdrop. An (albeit-imperfect) rules-based global order is rapidly unravelling. This creates both near-term uncertainties and medium-term concerns. Near-term uncertainties because as the rules of the game get suddenly, and arbitrarily, rewritten, markets are getting whiplashed on a daily basis. Which country will be the victim of the next set of tariffs? Is there any risk-free asset left in the world?
Will muscular industrial policy in developed economies successfully jawbone global capital back? Medium-term concerns because the political and economic balkanisation that this will inevitably engender is inimical to specialisation and exchange that underpinned the last 80 years of prosperity, notwithstanding the accompanying warts of heightened inequality and unsustainable imbalances. Generating growth in a world that is splintered will be hard.
So how should economies respond to these impulses? Heightened near-term uncertainty would argue for hunkering down: to build buffers and be fiscally and monetarily conservative to weather the external storm. But a more bleak medium-term global growth outlook would argue for the opposite—be more adventurous and expansive to avoid getting dragged down into mediocrity. This is especially so because economic heft is the key to geopolitical leverage in this brave new world.
This, then, was the tension confronting this year’s Budget. To be conservative and aggressive at the same time. One way to achieve this division of labour was to be conservative on the fiscal math but more expansive and adventurous on policy reforms.
The first task was achieved. Despite direct and indirect tax cuts, and a lower-than-expected nominal GDP, policymakers met this year’s fiscal deficit target of 4.4% of GDP and signalled a modest consolidation towards 4.3% of GDP next year. Furthermore, the fiscal assumptions going forward are relative conservative such that consolidation does not seem in any threat.
The first box was checked, but medium-term fiscal sustainability involves many more moving parts: it depends crucially on how growth pans out and whether state finances can be reined in. If nominal GDP growth averages 10% over the next five years, the Centre will have to reduce its deficit further to about 3.6% of GDP over four years to meet its debt target of 50% of GDP by FY31. But unless state deficits are reined in, state debt will continue to climb, such that combined public debt—which is what matters for the economy—will barely move from 82% to 79% of GDP by 2031.
Things get more hairy if nominal GDP growth slips to 9%, eminently possible in a world with ever-growing Chinese excess capacity that is creating disinflationary pressures across Asia. The Centre will have to reduce its deficit all the way to 3% of GDP by FY31, and this is keeping in mind that the 8th Pay Commission is expected to kick in from FY28. Furthermore, if state deficits remain at current levels, public debt to GDP will barely move in the next five years.
So despite the recent progress, the economy has its fiscal work cut out in the coming years. This will inevitably curb the quantum of support the fiscal can keep providing to the economy. First signs of this are visible. Public capex was a key driver of the post-pandemic recovery, with central capex growing 30% annually (in nominal terms) for the first four years. Things have inevitably slowed. Central capex slowed to 11% in FY25 and if the revised estimates for FY26 are met, central capex growth would have slowed to 4.2% this year. To be sure, authorities budget a 11.5% growth in FY27 but, over a two-year period, this would still suggest a compound annual growth rate (CAGR) of less than 8% (nominal) growth. Meanwhile, central PSU capex growth has averaged 8% over the last three years, undershooting nominal GDP growth. Finally, state capex growth between April-December 2025—the latest data available—has grown at a CAGR of just 6% (nominally) over the last two years.
So public sector capex—as a driver of growth—is inevitably slowing, as both fiscal space and absorptive capacity become constraints. The implication: the capex baton will have to progressively, and rapidly, pass to the private sector. This is where aggressive, expansive policy reform intent become crucial to jump-starting animal spirits, amongst domestic and foreign investors.
On its part, the Budget identified seven strategic sectors and proposed several measures for each. It also provided a tax holiday for the next two decades to any foreign firms that provides cloud services to customers globally by using data centre services from India. It created a safe harbour for the IT sector to protect it from tax uncertainty, and signalled setting up a high-level banking committee to review the sector.
These are all encouraging steps but reforms are an ongoing process and the structural ask is long. Policymakers will thus need to be consumed with key questions. How does India jump-start FDI to shore up capital flows and safely finance its current account deficit? How does India balance investments in strategic sectors—which tend to be much more capital-intensive—with energising labour-intensive sectors that are key to generating employment and harnessing India’s large, and aspirational, labour endowment?
How does India ensure the raft of FTAs signed recently—for which policymakers must be commended for not succumbing to export pessimism—move the needle on exports? The Budget made a slew of announcements on customs duties, but will a more overarching simplification and rationalisation of import duties eventually be needed to attract FDI and boost exports in a world of global value chains? What will it take for India’s private sector to undertake broad-based capex cycle in a world floating with Chinese excess capacity?
India is witnessing a smart cyclical upswing on the back of a raft of supports over the last year (income and GST cuts, monetary and regulatory easing, strong monsoon, and low inflation). But these will eventually fade, and we need to plan for the morning after. At that point, it’s crucial that cyclical supports are replaced with structurally underpinnings. Sustained policy reform translating into consistently strong growth will be India’s best insulation mechanism in the current global storm.