Context

• The Union Budget 2026–27 is framed as a critical step in India’s journey towards Viksit Bharat by 2047.
• It prioritises advanced technology sectors such as artificial intelligence, biopharma, semiconductors and critical minerals, reflecting long-term development ambitions.
• While the strategic direction is appropriate, the success of these initiatives depends on effective implementation, adequate fiscal space and the pace at which outcomes can be delivered in a resource-constrained environment. 

Key Highlights of Union Budget 2026-27

• Restructuring of Expenditure and Changing Fiscal Priorities
  • A key feature of recent fiscal policy has been the restructuring of government expenditure to accommodate new priorities.
  • The share of revenue expenditure in total expenditure has declined from 88 per cent in 2014–15 to about 77 per cent in 2026–27 (BE).
  • This reduction has been driven largely by a decline in central subsidies, allowing a corresponding increase in capital spending.
  • This shift signals a move away from consumption-oriented spending towards asset creation and long-term growth.
• Capital Expenditure: Role in Growth and Emerging Concerns
  • Public capital investment has played a crucial role in supporting economic recovery in the post-pandemic period.
  • Capital expenditure as a share of GDP has remained elevated, supporting infrastructure creation and demand.
  • However, the momentum of this spending has weakened. Capital expenditure growth declined sharply from 28.3 per cent in 2023–24 to 4.2 per cent in 2025–26 (RE).
  • Although growth is budgeted at 11.5 per cent in 2026–27 (BE), it is only marginally higher than nominal GDP growth, leaving capital expenditure nearly stagnant at around 3.1 per cent of GDP.
  • Repeated shortfalls between budgeted and actual spending raise concerns about execution capacity.
• Revenue Prospects and Tax Buoyancy Challenges
  • On the revenue side, tax projections appear cautious and achievable. However, the low buoyancy of gross tax revenues remains a constraint.
  • Overall tax buoyancy is estimated at 0.8, below the benchmark of one. While direct taxes show relatively strong responsiveness, indirect taxes lag behind. In particular, GST collections are not expected to keep pace with GDP growth.
  • With rising developmental and welfare commitments, strengthening indirect tax responsiveness becomes essential for maintaining fiscal balance.

Finance Commission Transfers and Centre–State Fiscal Relations

• The recommendations of the Sixteenth Finance Commission retain the share of States in the divisible pool of central taxes at 41 per cent.
• However, the discontinuation of revenue deficit grants and the absence of sector- or State-specific grants have reduced overall transfers.
• Finance Commission grants are projected to decline from 0.43 per cent of GDP in 2025–26 to 0.33 per cent in 2026–27.
• This reduction may constrain subnational governments at a time when their role in delivering public services and development programmes is expanding. 

Challenges and the Way Forward

• Fiscal Consolidation and the Debt–Deficit Strategy
  • The pace of fiscal consolidation has slowed considerably in recent years.
  • While the fiscal deficit to GDP ratio continues to decline, the annual reduction has narrowed to just 0.1 percentage point in 2026–27 (BE).
  • The shift in focus from deficit targeting to debt-GDP targeting does not significantly improve transparency, as both indicators are closely linked to nominal GDP growth.
  • A clear medium-term glide path outlining targets and assumptions would strengthen fiscal credibility.
• Rising Debt and Interest Payment Pressures
  • High public debt levels have increased interest payment pressures.
  • The effective interest rate on central government debt is projected to rise to 7.12 per cent in 2026–27, with interest payments absorbing nearly 40 per cent of revenue receipts.
  • This limits fiscal space for essential primary expenditure. Persistent high public borrowing also risks crowding out private investment, which could weaken medium-term growth prospects.

Conclusion

• The Budget presents a coherent roadmap for long-term development, with emphasis on technology-led growth and public investment.
• However, achieving these objectives requires careful balancing of ambition with fiscal prudence.
• Strengthening tax buoyancy, ensuring credible capital expenditure outcomes, maintaining adequate transfers to States and restoring momentum in fiscal consolidation are essential.
• Sustained economic expansion ultimately depends on macroeconomic stability and sustainability, both of which require disciplined and transparent fiscal management.