Moving Beyond the Goldilocks Moment: India's Budget Imperatives
As India approaches the Union Budget presentation on 1 February 2026, the macroeconomic landscape presents what appears to be a "Goldilocks" scenario—steady growth, controlled inflation, a maintained fiscal glide path, and upgraded sovereign ratings. However, beneath this seemingly favorable surface, the economy is transmitting mixed signals that demand urgent and strategic attention from policymakers.
The Industrial Pulse and Fiscal Realities
The output of the eight core industries registered a modest year-on-year growth of 2.6% during April–December of FY26, marking one of the slowest paces in a decade. This broad-based slowdown, which included contractions in natural gas, crude oil, and coal, indicates a subdued industrial pulse. It suggests that growth momentum is narrower than the headline narrative might imply.
While public capital expenditure has been instrumental in driving the post-pandemic recovery, it cannot remain the sole growth engine indefinitely due to debt dynamics. The Centre's gross tax revenues grew by only 3.3% in April–November of FY26, significantly below the 10.8% growth projected for the full year. This serves as a crucial reminder that even a fiscally strong state cannot perpetually rely on buoyant revenues while sustaining elevated public capex.
Reviving Private Investment Through GST Reform
A critical question emerges: how can private investment be crowded in without resorting to fiscal adventurism? The answer lies in addressing the invisible frictions that elevate the cost of capital. One of the most significant barriers is the current GST design. When input tax credits on capital goods remain trapped or unusable, the consumption tax inadvertently transforms into an investment tax.
The budget should prioritize a clean and credible reform that makes ITC on capital goods fully usable and refundable upon accumulation, rather than allowing it to remain stranded on balance sheets. This reform would enhance productivity and should not be misconstrued as a mere "giveaway."
Addressing the Employment Paradox at Scale
India's employment paradox remains stark: a disproportionately large fraction of workers continues to depend on agriculture, despite the sector's relatively small contribution to overall output. This structural imbalance is the root cause of wage stagnation, rural distress, and weak mass consumption.
The budget must place labour-absorbing growth at its core. This entails:
- Focusing on MSME credit and compliance simplification
- Enhancing labour-intensive export competitiveness
- Implementing targeted cluster strategies in sectors such as garments, footwear, food processing, electronics assembly, and light engineering
Addressing perennial MSME payment delays can be achieved by linking real-time GST filing with UDYAM data and automating penalties for those who unduly squeeze their suppliers. The budget should also articulate and strengthen employment-linked incentives.
Agricultural Transformation and AI Preparedness
Agricultural reform aimed at boosting productivity and enabling diversification is another vital priority. This involves:
- Advancing agricultural R&D and climate resilience
- Improving irrigation efficiency and post-harvest logistics
- Strengthening market linkages
Focus must shift towards incentivizing higher-value agri-allied activities, including dairy, fisheries, horticulture, and food processing.
Simultaneously, the budget must confront the challenges and opportunities presented by artificial intelligence. As both a services powerhouse and a labour-abundant economy, India is uniquely positioned. While AI can dramatically enhance productivity, it also risks displacing routine and mid-skill tasks across various sectors.
To harness AI's potential for leapfrogging, India needs to invest in reskilling at scale—encompassing digital literacy, domain skills, soft skills, and advanced technical training. A national reskilling push should be treated as a growth investment rather than mere welfare.
Ensuring Macro Stability and External Resilience
Macroeconomic stability remains paramount. Current low inflation is not a permanent entitlement and could reverse sharply due to base effects and commodity dynamics. The rupee, which was the worst-performing currency in 2025, continues to face pressure, keeping imported inflation a persistent threat.
With net FDI nearly falling to zero and trade deficit financing emerging as a new concern, the budget must emphasize:
- Export competitiveness and stable tariff policy
- Faster trade facilitation to insulate the domestic economy from global turbulence
The fiscal deficit should be gradually reduced from around 4.4% of GDP towards 4%, with adjustments being quality-driven—protecting capex, cutting waste, and improving tax administration.
A Clear Medium-Term Reform Roadmap
Finally, the budget must outline a clear medium-term reform roadmap, including:
- A credible path for managing debt and deficits
- A strategy for boosting private investment and manufacturing competitiveness
- A comprehensive plan for logistics and urban infrastructure development
- A human-capital and reskilling mission tailored for the AI era
- An agricultural transformation strategy that enhances productivity while reducing climate vulnerability
In a year marked by multiple transitions—including the upcoming recommendations of the Sixteenth Finance Commission, the long-awaited census, and the politically sensitive delimitation work—stability itself becomes a policy imperative. With a new income-tax framework being rolled out, the finance minister should limit changes to only essential adjustments, focusing on high-quality rule-making, stakeholder consultation, and robust dispute resolution.
Reducing litigation and compliance burdens can yield growth dividends that surpass those of many tax rate cuts. The budget should not merely celebrate the Goldilocks moment but leverage this period of relative macroeconomic calm to implement politically feasible reforms. By honestly reading the economic map and addressing its mixed signals, the finance minister can transform today's resilience into tomorrow's inclusive, job-rich, and private-investment-led growth.
