The Union Budget 2026–27 outlines India’s fiscal strategy to accelerate growth and enable the transition to a developed economy by 2047. However, concerns remain regarding implementation capacity, revenue buoyancy, Centre–State finances, and the pace of fiscal consolidation.
Budget Vision 2047 and Industrial Focus
- Viksit Bharat @2047 Vision: The Budget aligns India’s development strategy with the Fourth Industrial Revolution to achieve developed-nation status by 2047.
- Strategic Technology Push: Priority investments are proposed in AI, biopharma, semiconductors, and critical minerals to build future economic competitiveness.
- Rare Earth Corridor Initiative: A dedicated Rare Earth Corridor is envisaged to secure access to strategic minerals vital for high-tech and green industries.
- Window of Opportunity vs. Execution Risk: Delayed investment risks missing a critical window, as happened when others lost out during China’s 1980s manufacturing boom, while doubts remain about how fast and effectively projects will be implemented.
About Expenditure Restructuring- Capital Expenditure vs Revenue Expenditure
- Shift Toward Asset Creation: Government spending is being restructured from revenue expenditure to capital expenditure, prioritising asset-building over salaries, pensions, and subsidies.
- Declining Revenue Expenditure Share: Revenue expenditure has fallen from 88% of total spending in 2014–15 to 77% in 2026, alongside an 11% reduction in subsidies, reflecting improved fiscal discipline through reduced recurring and consumption-oriented spending.
- Higher Growth Multiplier: Increased CapEx is economically beneficial because it has a strong multiplier effect, where ₹1 of capital spending can generate up to ₹3 of overall economic output.
- Decelerating Capital Expenditure Growth: The Centre’s capital expenditure has remained high as a share of GDP in the post-COVID period, supporting economic growth.
- However, the annual growth rate of capital expenditure has declined sharply from 28.3% in 2023–24 to 10.8% in 2024–25, and further to 4.2% in 2025–26 (RE), weakening its growth-stimulating impact.
- Near-stagnation in Capital Expenditure: Capital expenditure growth is budgeted to rise to 11.5% in 2026–27 (BE), only marginally higher than the assumed nominal GDP growth of 10%.
- As a result, capital expenditure is expected to remain almost unchanged at 3.1% of GDP in both 2025–26 (RE) and 2026–27 (BE), reducing its incremental growth stimulus.
About Tax Buoyancy and GST Structure
- Definition: Tax buoyancy measures the responsiveness of tax revenue growth to GDP growth and should ideally be greater than 1.
- In 2026, overall tax buoyancy is 0.8.
- Composition: Direct tax buoyancy (income and corporate taxes) is strong at 1.1, while indirect tax buoyancy (0.3) under GST remains weak.
- Implication: Due to low GST buoyancy (0.3), the Centre’s gross tax revenue in 2026–27 (BE) is growing slower than nominal GDP, indicating structural issues in the indirect tax regime.
- GST reforms are required to raise indirect tax buoyancy (0.3) closer to 1, aligning revenue growth with economic growth.
Challenges to Cooperative Federalism
- Demand for Higher Devolution Share: States sought an increase in their share of the divisible pool to 50% in the 16th Finance Commission, but the commission retained it at 41%.
- Sharp Curtailment of Revenue Deficit Grants: The discontinuation of revenue deficit grants reduced total transfers to states from 4.3% of GDP under the 15th Finance Commission to just 0.33% of GDP.
- Strain on Cooperative Federalism: The contraction in fiscal support is likely to stress cooperative federalism by compelling states to shoulder greater expenditure responsibilities with limited central assistance.
Fiscal Consolidation, Fiscal Deficit and Debt Management
- Slow Fiscal Consolidation: The fiscal deficit is being reduced marginally—from 4.4% to 4.3%, indicating a slower pace of consolidation than in earlier years.
- Deviation from FRBM Targets: The deficit remains significantly above the 3% limit mandated under the FRBM Act, 2018, reflecting weak fiscal discipline.
- Deficit–Debt Interlinkage: Although the government emphasises reducing the debt-to-GDP ratio, persistently high deficits inevitably translate into higher public debt.
- The debt-to-GDP ratio is a measure of a country’s total public debt compared to its Gross Domestic Product (GDP).
Consequences of High Debt-to-GDP Ratio
- Crowding Out of Private Investment: Elevated government borrowing absorbs available capital, making it harder for private firms to access credit and dampening investment.
- Rising Interest Burden: About 40% of revenue receipts are allocated to interest payments, severely constraining fiscal space for priority sectors such as health and education.
- Macroeconomic Vulnerability: High debt increases exposure to interest rate shocks, inflationary pressures, and external financial instability.
- Lower Policy Credibility: Persistent high debt can erode investor confidence and sovereign credit ratings, further raising borrowing costs.
Conclusion
While the Budget lays out a credible roadmap towards Viksit Bharat 2047 by identifying key growth sectors, achieving this vision will depend on restoring fiscal consolidation and ensuring sustained monetary and fiscal stability.
5 Feb 2026
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