Context:

• There is the need to analyse the Union Budget 2026-27 against the backdrop of intensifying geopolitical uncertainty, trade fragmentation, and macroeconomic constraints.
• The core argument is that the Budget marks a decisive shift towards trade, capital formation, technology, and export competitiveness as engines of growth, while attempting to preserve macroeconomic stability in a volatile world.

Changing Global Order - From Integration to Fragmentation:

• The global economy is witnessing a rupture in the old order, marked by -
  • Tariffs, export controls, and licensing regimes by the US and China
  • Restrictions on advanced technologies
  • Fragmentation of global value chains
• This has reignited debates on -
  • Inflation vs growth trade-offs
  • Capital flows and currency management
  • India’s attractiveness as an investment destination
• The Budget and Economic Survey 2025-26 subtly recognizes this chaotic shift, supporting "Carney-ism"—the notion that nations that can forge agile alliances in the areas of commerce, energy, and security will gain influence.

Trade as an Engine of Growth:

• Budget speech: The Finance Minister’s mantra this year has been capital, technology, and export competitiveness.
• Reflected in:
  • Trade agreements with the EU, UK, Australia, UAE and Oman
  • Rationalisation of customs duties and correction of inverted duty structures
• The approach balances Atmanirbharta (self-reliance) with deeper integration with trusted partners, particularly in Asia and Europe.

Macroeconomic Constraints - CAD, Debt and Savings:

• The Economic Survey warns that a persistent Current Account Deficit (CAD) raises macro risk premium, and interest rates.
• However, CAD of 1.3% of GDP (Q2 FY26) need not be eliminated by running down forex reserves, as India has managed higher CADs in the past with adequate buffers.
• The FRBM Review Committee placed sustainable CAD at around 2.3% of GDP.

Blueprint for India’s “Goldilocks” Economy:

• Fiscal credibility beyond headline deficits:
  • Fiscal consolidation since FY21:
    • Deficit reduced from 9.2% (FY21) to 4.8% (FY25) and 4.4% (FY26).
    • Public capex has risen to Rs 11.21 lakh crore, while the general government debt-to-GDP ratio has declined by over seven percentage points.
  • Role of GST: GST provides a new source of information as well as revenue, and encourages movement from informal to formal.
  • Challenges:
    • Government borrowing absorbs a large share of net household financial savings.
    • Shift of household savings to equity markets may raise borrowing costs.
    • High cost of capital hurts manufacturing and MSMEs.
  • Imperative: Fiscal discipline must crowd in private investment, not pre-empt it.
• State finances and cooperative fiscal federalism:
  • State deficits have risen since FY22, reaching around 3.2% of GDP in FY25, while state debt remains close to 28% of GDP.
  • In integrated sovereign debt markets, sub-national slippages raise borrowing costs for all. Therefore, cooperative fiscal federalism must move beyond transfers toward shared discipline and credible rules.
• Private investment as the growth bridge:
  • The Centre is leading by example with additional grants of Rs 1.6 lakh crore to raise states’ capex.
  • However, capex alone cannot remain the primary growth engine, private investment must lead, as it remains the bridge between macroeconomic stability and sustained growth.
  • The investment rate has stabilised near 30% of GDP, corporate balance sheets have strengthened, and capacity utilisation has improved.
  • The Budget emphasises simplified regulations, faster contract enforcement, and lowering the economy-wide cost of capital.
• Competitiveness, manufacturing and climate:
  • Industrial GVA grew by 7% in the first half of FY26, with medium and high-technology manufacturing accounting for nearly half of this.
  • The Budget strengthens competitiveness through rationalised customs duties, correction of inverted duty structures, faster MSME payments, and stronger private R&D.
  • The Budget’s focus on carbon capture utilisation and storage (CCUS), will be good for India while enabling exports to Europe (e.g., CBAM) and elsewhere.
  • This means climate action is now an instrument of industrial and trade policy.

Human Capital, AI and Urban Transformation:

• Labour and productivity:
  • India’s workforce exceeds 56 crore, unemployment has declined to 4.8%, and female labour force participation has crossed 41%.
  • AI is expected to lift productivity, with the Economic Survey projecting total factor productivity growth of 1.9% annually.
• Urban transformation:
  • Cities as growth engines: Cities generate a disproportionate share of output and FDI. Budget focus on City Economic Regions (CERs). For example, ₹5,000 crore per CER over five years, and funding will be linked to outcomes.
  • Urban finance: Between 2017 and 2025, municipal bonds — further incentivised in this Budget — raised Rs 2,834 crore. Property taxes now account for about 60% of urban local body revenues.
  • Without stronger municipal finance and governance, India risks losing agglomeration benefits in labour absorption and capital attraction. Pollution and congestion are a major constraint on talent, investment, and growth.
  • Therefore, urban infrastructure needs reforms that reduce emissions, manage mobility and improve service delivery.

Challenges and Way Forward:

• Fragmented global order and trade uncertainty: Build agile alliances across trade, energy and security.
• High cost of capital: For MSMEs and manufacturing. Crowd in private investment through lower cost of capital.
• Rising state-level fiscal risks: Maintain credible fiscal consolidation with quality expenditure. Strengthen cooperative fiscal federalism.
• Climate risks to industrial competitiveness: Integrate climate policy with industrial strategy.
• Weak urban governance and infrastructure stress: Invest in human capital, AI adoption and urban reforms. Stronger, cleaner public transport spurs inclusion and creates opportunities for poor people to benefit from urban growth.

Conclusion:

• In a harsher and more fragmented global environment, the Union Budget seeks not just to accelerate growth, but to govern growth with judgement and resilience.
• It reflects a Schumpeterian moment of creative destruction, creating space for new investments, technologies and alliances.
• By aligning fiscal prudence, trade openness, climate competitiveness and urban transformation, the Budget positions India to protect growth while reshaping its development trajectory for a turbulent world.