Statsguru: Budget 2025-26 pushes demand, caps capital expenditure

The Budget 2025-26 aims to revive economic momentum, but it has set a nominal gross domestic product (GDP) growth target of 10.1 per cent for FY26, slightly higher than the 9.7 per cent recorded in the previous year and less than 10.5 per cent assumed in the previous Budget. This comes after two consecutive years of the economy falling short of expectations (Chart 1). 

A key driver of this effort is a demand push through cuts in personal income tax rates under the new tax regime. Even then, gross tax receipts are projected to inch up to 12 per cent of GDP in FY26 (Chart 2). 

 

The government is trying to rein in capital expenditure in FY 26 after actual capex declined in the current financial year relative to the Budget projection. However, its share in total expenditure is projected to increase to 22.10 per cent in FY26, up from 21.6 per cent in FY25. This means a higher leash on revenue expenditure that would raise the quality of expenditure (Chart 3). 

Meanwhile, the Budget documents suggest that the government expects a flat subsidy (Chart 4). 

 While boosting income tax collections, the government maintains a cautious approach to social sector spending. Both health and education spending is projected to be flat as a proportion to GDP in FY 26 year-on-year (Chart 5). 

In the past decade, the government invested heavily in infrastructure to boost growth and employment. Now, capex has to bear the burden of fiscal consolidation with the government expecting the private sector to chip in (Chart 6).