In a world rife with uncertainty, the Indian economy has displayed remarkable resilience, peppered with some inevitable unevenness. In this context, the Government presented its Union Budget for FY2026, with high expectations for how fiscal policy could support and reinforce the domestic macros.

The Revised Estimates (RE) for FY2025 revealed that revenue receipts mildly undershot the budgeted targets leading the revenue deficit to be higher than expected (1.9 per cent of GDP vs 1.8 per cent). However, an inevitable shortfall in capital expenditure helped to contain the fiscal deficit to an expected 4.8% of GDP, a shade below the budgeted 4.9 per cent of GDP.

The Budget Estimates (BE) for FY2026 BE have placed the revenue and fiscal deficits at 1.5 per cent and 4.4 per cent of GDP, respectively, which is a commendable degree of fiscal consolidation. More importantly, the fiscal deficit target for FY2026 adheres to the extant medium term fiscal path, which had aimed to contain it below 4.5 per cent of GDP.

The FY2026 BE pencils in a growth of 6.7 per cent in revenue spending and a higher 10.1 per cent in capital expenditure. The latter is budgeted to go up by ₹1.0 trillion to ₹11.2 trillion in FY2026 BE from the pared ₹10.2 trillion in FY2025 RE, while remaining at 3.1 per cent of GDP. One quarter of this increase in capex is coming from the interest free capital expenditure loans to the state governments. Their offtake is affected to a great degree by the fine print, including the mix between untied and tied loans and the conditions related to the latter.

While the allocations for rail and roads are flattish, that for defence has seen an increase. In addition, a generous outlay has been built in for ‘new schemes’ under the Ministry of Finance, the details of which are awaited. An early articulation of these schemes would be important to get capex off to an early start and avoid a downward revision as has been seen in FY2025.

Within the revenue expenditures, encouragingly subsidies are quite flat in FY2025 RE and FY2026 BE. Establishment costs are budgeted to rise by a modest 3.6%, a relief ahead of the looming Pay Commission’s recommendations. However, interest payments are set to expand by an unpleasant 12 per cent.

Nominal GDP growth has been projected at 10.1 per cent, similar to our forecast of 10%. While gross tax revenues are budgeted to expand by 10.8 per cent, which seems only slightly higher than the rise in nominal GDP, this masks over the substantial revenue foregone from the tax relief measures that the Budget has announced. The latter aggregate to a little over ₹1 trillion, rivalling the fiscal push from enhanced capital spending, and would no doubt boost consumption in the economy.

In our view, the tax growth appears a little optimistic, casting a pall on the credibility of the overall fiscal math.

What if gross taxes were around ₹0.5 trillion lower than budgeted? This would imply a net tax revenue growth of 9.6 per cent, which seems more feasible. Further, this entails a shortfall of around 0.1 per cent of GDP, inter alia implying a fiscal deficit of 4.5 per cent of GDP, our original forecast, instead of the budgeted 4.4 per cent of GDP. Moreover, the additional implied borrowings would just about add another week to the borrowing calendar, which shouldn’t overly perturb the bond market, if this scenario were to materialize.

Another what if scenario, this time on the expenditure side. What is capex actually fell short of the FY2026 BE by a similar 0.1 per cent of GDP, and came in around Rs. 10.9 trillion instead, a trickle below our original projection of Rs. 11.0 trillion. This can’t be ruled out if the aforesaid ‘new schemes’ aren’t unveiled expeditiously.

Coming back to the borrowings based on the FY2026 BE, the gross and net dated borrowings have been placed at ₹14.8 trillion and ₹11.5 trillion, respectively, quite similar to our anticipation. Notably, the gross figure builds in the adjustment related to the redemption of the GST compensation loans that had been raised during Covid and on-lent on a back-to-back basis to the state governments.

An update we were keenly awaiting in the FY2026 Union Budget was commentary on the new medium term fiscal path. The Budget has confirmed a shift away from rigid fiscal deficit to GDP ratios, to debt to GDP ratios. In the absence of a major macro-economic disruptive exogenous shocks, the government aims to keep fiscal deficit in each year from FY2027 till FY2031, such that its debt is on a declining path to achieve a debt to GDP level of about 50±1% by 31st March 2031, which happens to be the last year of the 16th Finance Commission cycle, from 56.1 per cent in FY2026 BE.

This approach would afford operational flexibility to the government to respond to unforeseen developments, which have quite frankly abounded in the last six years.

The writer is Chief Economist, Head- Research & Outreach, ICRA

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