Last Updated on February 1, 2026 2:44 pm by INDIAN AWAAZ
R. Suryamurthy
India’s Union Budget for 2026-27 sets out a cautious macroeconomic strategy built around a single premise: that sustained economic growth—rather than fiscal retrenchment—will stabilise public finances even as borrowing remains high and global conditions turn less supportive.
The numbers reveal a Budget that is neither overtly expansionary nor contractionary. Instead, it relies on higher public investment, contained revenue spending, and an implicit assumption of strong nominal GDP growth to keep deficits and debt ratios on a declining path.
Spending rises, driven by capital outlay
Total expenditure in Budget Estimates (BE) 2026-27 is projected at ₹53.47 lakh crore, marking a 7.7% increase over Revised Estimates (RE) of ₹49.65 lakh crore in 2025-26, and nearly 15% higher than actual spending of ₹46.53 lakh crore in 2024-25.
Capital expenditure remains the principal growth lever. Capital outlay rises to ₹12.22 lakh crore, up from ₹10.96 lakh crore in the previous year—an increase of 11.5%. Including grants for creation of capital assets, effective capital expenditure jumps to ₹17.15 lakh crore, a sharp 22% rise from ₹14.04 lakh crore in 2025-26.
By contrast, revenue expenditure growth remains modest, underscoring the government’s effort to prioritise asset creation over consumption-led fiscal stimulus.
Revenue growth rests on tax buoyancy
On the receipts side, total revenue receipts are estimated at ₹35.33 lakh crore, up 5.7% from ₹33.42 lakh crore in RE 2025-26.
Net tax receipts to the Centre are budgeted at ₹28.67 lakh crore, an increase of 7.2% over ₹26.75 lakh crore a year earlier. Income tax continues to outperform, with collections projected at ₹14.66 lakh crore, up from ₹13.03 lakh crore, a rise of 12.5%, reinforcing the growing dependence on direct taxes.
GST receipts are estimated at ₹10.19 lakh crore, broadly flat in real terms, pointing to moderation in consumption growth. Non-tax revenue is pegged at ₹6.66 lakh crore, marginally lower than last year’s elevated levels, reflecting reduced reliance on one-off dividend transfers from public sector enterprises and the central bank.
Deficit narrows, borrowing remains elevated
The fiscal deficit for 2026-27 is budgeted at ₹16.96 lakh crore, equivalent to 4.3% of GDP, down from 4.4% in RE 2025-26 and 4.8% in actuals of 2024-25.
However, the improvement is largely optical. In absolute terms, the deficit increases by nearly ₹1.38 lakh crore, reflecting higher spending levels. Net market borrowings are estimated at ₹11.73 lakh crore, while gross market borrowings rise to ₹17.2 lakh crore, underscoring the government’s continued dependence on debt financing.
Interest payments remain a structural constraint, consuming ₹14.04 lakh crore, or over 40% of net tax receipts, sharply limiting fiscal flexibility despite consolidation efforts.
Debt ratio eases slowly
Government debt is projected to decline marginally to 55.6% of GDP in 2026-27 from 56.1% a year earlier. While the direction is downward, the pace of adjustment remains slow, reflecting the trade-off between growth support and fiscal restraint.
The primary deficit—which excludes interest payments—declines to 0.7% of GDP from 0.8%, signalling some improvement in underlying fiscal health.
Nominal GDP growth: the Budget’s silent assumption
Although the Budget does not explicitly state a nominal GDP growth target, the fiscal arithmetic points clearly to an assumption of around 10–10.5% nominal GDP growth in 2026-27.
This inference rests on three indicators: tax receipts rising faster than real output, a declining deficit ratio despite higher absolute borrowing, and a falling debt-to-GDP ratio alongside expanding expenditure. These outcomes are internally consistent only if nominal growth remains comfortably in double digits—combining real growth of around 6.5–7% with inflation of 3–3.5%.
Nominal growth is critical for fiscal sustainability. When nominal GDP expands faster than the government’s effective borrowing cost, debt ratios can decline even with moderate deficits. In this Budget, that logic underpins the consolidation path.
A slowdown in nominal growth below 9% would quickly strain the arithmetic, forcing either higher borrowing, sharper spending restraint, or renewed reliance on one-off revenues.
Transfers to states rise sharply
Total transfers to states—including tax devolution, grants and loans—are budgeted at ₹25.44 lakh crore, an increase of ₹3.78 lakh crore over actual transfers in 2024-25.
This reflects the acceptance of the 16th Finance Commission’s recommendation to retain 41% vertical devolution, strengthening cooperative federalism but tightening the Centre’s own fiscal space. The arrangement assumes that rising GDP will expand the overall fiscal envelope rather than new tax measures or reduced devolution.
Subsidies and social spending remain contained
Major subsidies are capped at ₹4.55 lakh crore, with food subsidy at ₹2.28 lakh crore and fertiliser subsidy at ₹1.71 lakh crore—well below pandemic-era peaks but still vulnerable to commodity price volatility.
Spending on health, education and skill development rises modestly in nominal terms, broadly tracking inflation rather than signalling a structural expansion. Defence expenditure remains stable as a share of total spending.
Growth-led consolidation, with execution risks
The Budget’s strategy rests on the assumption that sustained public investment will crowd in private capital and stabilise growth near the 7% mark highlighted in the Budget Speech. Yet private investment as a share of GDP remains below historical highs, while consumption growth shows signs of fatigue.
With exports constrained by weak global demand and fiscal headroom narrowing, the success of Budget 2026-27 will depend heavily on execution—whether capital spending translates into timely asset creation, productivity gains and employment.
In macroeconomic terms, the Budget represents a calculated wager: higher spending, higher borrowing, and marginally lower deficits, anchored by confidence that India can grow its way out of fiscal stress rather than cut its way through it.
If nominal growth holds, the consolidation path remains intact. If it falters, the margin for correction will narrow rapidly.