India's Economic Paradox: Strong Growth Meets Budgetary Constraints
On the surface, India presents the picture of an ideal Goldilocks economy—boasting one of the world's highest GDP growth rates alongside historically low inflation levels. This combination should theoretically provide the government with substantial flexibility and maneuvering room in the upcoming budget. However, a deeper examination reveals significant gaps that create serious challenges for policymakers.
The Nominal GDP Conundrum
According to the statistics ministry's first advance estimates for 2025-26, India's real GDP is projected to grow at an impressive 7.4%, potentially making it the world's fastest-growing major economy. Yet the nominal GDP growth—which measures economic output in current rupee terms—is estimated at only 8%. This figure stands in stark contrast to the two-decade average of approximately 12%.
While real GDP growth captures headlines, most concrete economic metrics—from corporate profits to tax collections—are tied to nominal GDP expansion. The current anaemic 8% nominal growth rate creates significant revenue challenges for the government.
Tax Collection Shortfalls
When last year's budget was presented, the government estimated nominal GDP growth at over 10%. Based on this projection, corporate tax collections were budgeted to grow at 10.7% and GST revenues at 10.9%. Surprisingly, despite substantial personal tax cuts, non-corporate tax collections were projected to increase by 14.4%.
The only plausible explanation for this optimistic forecast was anticipated hefty inflows from capital market-related taxes, with the securities transaction tax (STT) estimated to rise by a remarkable 40%. As noted at the time, "While the regulator may be talking against excess speculation, many including the government seem to be banking on it."
With both nominal GDP growth slowing and stock market performance weaker than expected, tax collections have significantly underperformed budget estimates. From April 2025 to January 11, 2026, total net tax collections grew only 8% compared to the budgeted 11% increase. If this trend continues through the fiscal year, India could face a tax collection shortfall exceeding ₹1.3 trillion.
Limited Fiscal Space
Despite numerous wish lists from various economic participants requesting either tax concessions or increased government spending in their sectors, the government has very little fiscal leeway. Given sluggish tax collections, there's minimal room for concessions unless policymakers allow the fiscal deficit to balloon—an option that may not be politically or economically palatable.
Compounding this challenge is India's recent growth pattern, which has been heavily dependent on government spending. Capital expenditure by the government has increased nearly fivefold over the past decade, though not all investments have proven productive. For instance, while India has built an airport approximately every 50 days in recent years, many remain underutilized—with 15 airports completely unused and nearly 50 handling fewer than five flights daily.
Priority Areas for Investment
Unlike many economic commentators who focus primarily on corporate interests and capital markets, the priority areas that deserve government attention are:
- Education: India currently allocates only 3-4% of GDP to education, far below the 6% target and China's investment level of over 6% of GDP (which translates to seven-and-a-half times India's spending in absolute terms).
- Health: India has the world's highest number of undernourished and anaemic children, with approximately one-third underweight and over two-thirds anaemic.
- Employment: India's demographic dividend can only yield returns if young people find jobs, which requires adequate education and skills development.
- Research: India spends a mere 0.6% of GDP on research and development, compared to China's investment that's 25 times larger in absolute terms.
These areas may not deliver immediate, glamorous results, but their impact compounds over time, creating the essential building blocks for sustainable economic growth and national development.
The Finance Minister's Challenge
The finance minister faces an unenviable task in balancing competing demands with limited resources. While there may be scope for trimming some government expenditures, such reductions would inevitably have a sobering impact on GDP growth, given the economy's reliance on public spending.
India's strong headline growth numbers mask underlying fiscal constraints that leave minimal room for either tax cuts or significant spending increases. The budget must navigate this complex landscape while keeping long-term national priorities in focus.
