Context

• The Union Budget 2026–27 is presented during a rare phase of strong economy performance marked by high growth and relatively low inflation.
• India’s rise to become the fourth-largest global economy reinforces optimism, yet underlying vulnerabilities remain.
• Geopolitical tensions, tariff wars, and supply-chain disruptions pose risks to long-term expansion.
• Against this backdrop, the Budget seeks to balance optimism with realism by maintaining continuity, articulating a long-term vision, and offering selective short-term interventions aimed at sustaining growth and improving welfare.

Growth with Fiscal Prudence

• A defining feature of the Budget is its adherence to fiscal discipline while continuing to rely on public investment as the main growth driver.
• The increase in capex to ₹12.2 lakh crore for FY27 signals continuity in infrastructure-led expansion.
• Simultaneously, the commitment to consolidation is reflected in the fiscal deficit target of 4.3% of GDP, aligning with the medium-term goal of lowering public debt.
• The borrowing programme involves significant borrowing, with higher gross market issuances even as net borrowings remain stable.
• Assumptions of nominal GDP growth above 10% appear realistic given projected real growth and moderate inflation.
• However, the scale of government borrowing may restrict further monetary easing, limiting room for interest rate cuts.
• This interaction between fiscal and monetary policy underscores the delicate balance required to sustain momentum without destabilising macroeconomic conditions.

Strategic Push for Manufacturing and Frontier Sectors

• A notable shift in the Budget is its early and explicit focus on manufacturing.
• The strategy targets emerging industries, legacy sectors, and MSMEs, signalling an intent to broaden the production base beyond services.
• Support for seven strategic sectors, including semiconductors, electronics, biopharma, chemicals, capital goods, and textiles, reflects a move beyond earlier incentive-based frameworks toward deeper industrial capability building.
• Enhanced allocations for electronics and the launch of India Semiconductor Mission 2.0 aim to reduce dependence on fragile global supply chains.
• Investments in logistics, freight corridors, and container manufacturing strengthen export competitiveness, particularly in a volatile global trade environment.
• Measures supporting exports affected by higher tariffs, alongside the creation of an SME Growth Fund, address structural financing gaps and encourage scalable enterprise growth.

Contradictions and Policy Surprises

• Despite its coherence in several areas, the Budget presents notable inconsistencies.
• Expectations of substantial revenue from disinvestment appear optimistic given repeated shortfalls in previous years.
• A major surprise is the long-term tax exemption for global cloud service providers operating through Indian data centres, raising questions about opportunity costs and revenue foregone.
• The anticipation of job creation in the services sector contrasts with trends of automation and artificial intelligence reducing labour absorption, weakening assumptions around employment
• The strong push for data centres increases demand for data infrastructure but is not matched by a corresponding emphasis on power generation, despite the sector’s high energy intensity.
• Additionally, the continued silence on exchange rate volatility leaves the issue of the rupee unaddressed, despite its macroeconomic significance.

Structural Gaps and Demand Constraints

• While the emphasis on manufacturing is welcome, the absence of a comprehensive industrial policy framework risks leaving initiatives fragmented.
• Industrial expansion requires sustained domestic demand, yet demand-side measures receive limited attention.
• Shortfalls in effective capital expenditure relative to budgeted targets weaken multiplier effects and undermine assumptions of demand-led expansion.
• Given uncertainty in global markets, domestic income and job growth are critical to sustaining manufacturing momentum.
• Weak execution of planned investments and rising prices threaten real purchasing power, potentially constraining consumption.
• Addressing these gaps is essential to building long-term resilience and ensuring that growth translates into broad-based gains.

Conclusion

• The Union Budget 2026–27 reflects an attempt to balance ambition with caution.
• It reinforces infrastructure-led investment, prioritises strategic manufacturing, and maintains macroeconomic stability.
• However, optimistic revenue assumptions, internal contradictions, and limited attention to domestic demand and implementation challenges constrain its transformative potential.
• Sustained growth will depend on aligning vision with delivery and strengthening the structural foundations of the economy.