Budget 2026 delivers well on prudence and focuses on future thrust areas

Union Budget 2026 stays focused on fiscal prudence, targets a 4.3% deficit, sustains ₹12.2 trillion capex, and backs rare earths, freight corridors, waterways and data centres, writes Madan Sabnavis

Given that major reforms had been implemented last year, not much was expected on the taxation front in the Union Budget for 2026-27. But the Budget was eagerly awaited for two reasons.

 

First, the reforms push: While the Indian economy has performed well, the external environment remains uncertain. In fact, the Economic Survey also noted the paradox of a strong economy coexisting with a volatile rupee. And second, the trajectory of the fiscal deficit — the arithmetic of the Budget and how it would accommodate the cost of any new policy measures.

 

Starting from the numbers, the Budget shows that the dominant ideology driving the content is prudence. This is evident in the government's target of a fiscal deficit ratio of 4.3 per cent this year, which suggests we are on track to target a debt-to-GDP (gross domestic product) ratio of 50 per cent in the near term, though it would be 55.6 per cent this year.

 

 

The fiscal-deficit numbers imply a gross borrowing programme of ₹17.2 trillion and net borrowing of ₹11.7 trillion. It remains to be seen how the market reacts, since gross borrowing is higher than last year even as the net market borrowing is unchanged. The higher gross number reflects larger redemptions due this year. As FY26 showed, state borrowing will also matter for bond yields.

 

Nominal GDP growth has been assumed at 10 per cent, which appears realistic, as the low-base effect of FY26 should lift the number this year. If the Economic Survey’s real GDP growth projection of 6.8–7.2 per cent holds, it implies inflation of about 2.9-3.2 per cent in terms of the GDP deflator — suggesting average consumer price index (CPI)-based inflation of 4 per cent-plus.

 

These estimates could change once the new base becomes clear, but in this scenario there may be limited room for further rate cuts. Given the larger borrowing programme, the Monetary Policy Committee (MPC) may prefer a wait-and-watch approach.

 

Social welfare programmes appear well targeted, as reflected in allocations for farmers and employment — the two largest heads for the government. At the same time, the government has remained committed to capital expenditure, with an outlay of ₹12.2 trillion. While there are signs that private-sector capex is picking up, the government has so far been the main driver, making the distribution of these allocations across sectors important.

 

The financial sector could see some major reforms after the setting up of a committee to review the system and offer recommendations. The move to allow market makers in the bond market should be positive, and could help boost trading activity.

 

On the policy front, the Budget focused on agriculture, industry, micro, small and medium enterprises (MSMEs) and exports, with several interlinkages across these areas. It also introduced specific allocations for newer priorities such as rare earths, freight corridors, waterways and data centres. Over the longer term, the rare-earth push could help India become more self-sufficient, while support for data centres could strengthen the country’s position as a hub for global capability centres.

 

Overall, the Budget balances fiscal prudence with a sharper focus on future thrust areas, bringing not just novelty but also pragmatism.

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The author is chief economist, Bank of Baroda. Views are personal.