Budget 2026: Balancing Fiscal Discipline with Growth Imperatives
Finance Minister Nirmala Sitharaman will present the Union Budget for the next financial year (FY27) on February 1. This comes at a time of rising geopolitical risks, US tariffs, and a weakening rupee. The government is expected to maintain its focus on fiscal consolidation. India's medium-term fiscal strategy aims to narrow the deficit and bring central government debt towards 50% of GDP by FY31.
Fiscal consolidation has been a consistent trend since 2014. At the same time, the government has steadily increased capital expenditure as a percentage of overall spending. However, some concerns have emerged. Observers worry that the government's focus on fiscal consolidation might lead to lower capital expenditure. This could potentially weigh on India's economic growth momentum.
Expert Insights on Fiscal Consolidation and Growth
Mint spoke to top economists to understand their expectations for Budget 2026. Here is a summary of their views.
Manoranjan Sharma, Chief Economist at Infomerics Ratings
Fiscal consolidation by the Indian government does not inherently threaten growth momentum. When consolidation is gradual and anchored in capital expenditure, it can comfortably coexist with growth. Public capex carries a high multiplier and tends to crowd in private investment.
Growth risks emerge only under specific conditions. These include front-loaded consolidation during an economic slowdown, disproportionate targeting of productive spending, or a sharp pullback in capex due to fiscal pressures at the state level. In such cases, growth could moderate.
In the near term, fiscal consolidation is unlikely to significantly curtail government capex. Capital spending remains relatively insulated due to strong policy signalling, a credible medium-term fiscal framework, and the use of off-budget financing and asset monetisation mechanisms.
Overall, there is no fundamental trade-off between fiscal consolidation and growth, provided the process is gradual and capex-friendly. Government capex is more likely to be moderated rather than cut, unless triggered by a major macroeconomic shock. The overarching strategy remains focused on reducing the fiscal deficit while continuing to strengthen the economy’s productive capacity.
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Group
While fiscal consolidation has been a consistent trend since 2014, the government has also steadily increased capital expenditure. In 2014, capex accounted for around 13% of total expenditure. Today, it stands at about 21–22%.
While overall capex should remain strong, its distribution is likely to change. Geopolitical risks persist, but we expect the growth in defence outlays to moderate. This does not mean defence spending will decline. Its growth rate could slow. As a result, sectors such as energy and other infrastructure segments could see relatively higher increases in allocation.
Madhavi Arora, Lead Economist at Emkay Global
The Central Government is now going to target debt-to-GDP as a metric. Nominal GDP will become an important variable to see cyclical changes in fiscal deficit.
Combined fiscal deficit consolidation has slowed in the last three years, including FY26. States continue to diverge from their budgets and have crossed 3% of GDP. This has also led to a less tight net fiscal impulse over the last two to three years.
Radhika Rao, Senior Economist and Executive Director at DBS Bank
The Budget is likely to stay committed to further supply-side measures to draw in private sector investments. This serves as a key offset to global uncertainties.
"We expect the total Centre’s capex budget in FY27 to stay around 3.1-3.2% of GDP. This is up nearly 7% YoY from FY26, with an emphasis on identifying shovel-ready and greenfield projects. The state machinery, which spends more than the centre, will also have to overcome fault lines to boost consolidated expenditure," said Rao.
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