FM Sitharaman shows adequate caution in drawing up a conservative Budget

India with its nearly 1.5 billion people has grown from being the 10th largest economy in 2014 to the 4th largest now, behind the US, China and Germany. 

For four successive years, it has also been the fastest growing large economy in the world.  It is like a large ship at high speed. 

Yet, the challenge remains. With per capita income still at only about $2,700, to join the ranks of developed countries, India will need to sustain fast growth during the last quarter of the first century of Independence — the Amrit Kaal or Golden Era announced by Prime Minister Narendra Modi on Independence Day in 2021. 

In recent years, rapid growth has been achieved with price stability. Retail inflation, as measured by the Consumer Price Index (CPI), has followed a clear downward trajectory, reaching 1.7 per cent in 2025–26. So why not push the accelerator and rev up growth through aggressive and expansionary fiscal policies? The main problem is with the turbulent world economic order. 

Steering a large ship at high speed in turbulent waters is an arduous task with large downside risks. 

The recently agreed trade deal with the US, slashing punitive duties on Indian exports from 50 per cent to 18 percent, is welcome. But the recognition that US trade policy under President Donald Trump is now shaped primarily by security and political considerations, rather than efficiency or multilateral rules, adds to the uncertainty. The Economic Survey notes the rapid rise of ‘economic statecraft’,  the deliberate use of economic means to achieve strategic ends. 

Geopolitical problems continue to sully matters in Ukraine and West Asia. Risks associated with large investments in artificial intelligence (AI), concentrated in a few countries, compound the uncertainty about the future prospects of the world economy. Under these circumstances, finance minister Nirmala Sitharaman has wisely demonstrated adequate caution in drawing up a conservative Union Budget for 2026-27. 

For the current fiscal year 2025-26, the caution is evident in the finance minister sticking to her announced fiscal consolidation path, despite a shortfall of ₹90,059 crore in non-debt receipts at the Revised Estimate (RE) stage relative to the Budget Estimate (BE) stage. Through judicious expenditure management, the government has managed to contain the fiscal deficit at ₹10,044 crore below the BE.  Fiscal deficit as a proportion of GDP is 4.4 per cent in 2025-26, the same as in the BE, and 40 basis points below the fiscal deficit of 4.8 per cent of GDP in 2024-25.  In 2026-27, the government promises to keep the fiscal deficit at 4.3 per cent of GDP. 

In the 2026-27 Budget, expenditure has been restructured while maintaining the focus on education, health and defence. Between 2025-26 (BE) and 2026-27 (BE), expenditure on school education and literacy has been augmented from ₹78,572 crore to ₹83,562 crore, on higher education from ₹50,078 crore to ₹55,727 crore, on health and family welfare from ₹95,958 crore to ₹1.01 trillion, and on defence capital outlay from ₹1.8 trillion to ₹2.19 trillion. In the infrastructure sector, between 2025-26 (BE) and 2026-27(BE), outlays on railways have gone up from ₹2.55 trillion to ₹2.81 trillion, and on road transport and highways from ₹2.87 trillion to ₹3.09 trillion. 

With expansionary fiscal policy in advanced economies, investors have started to question the ability of these economies to cover these deficits. This is reflected in the long-term borrowing cost of the world’s largest economies. In such a situation, establishing policy credibility by sticking to the announced path of fiscal consolidation is a laudable goal. So is the target of bringing down debt, from 56.1 per cent of GDP in RE 2025-26 to 55.6 per cent of GDP in BE 2026-27.  It is useful to remember that the miracle economies to our East, the so-called Asian Tigers, sustained high growth for decades by following prudent fiscal policies. 

Political competition in providing untargeted transfers and subsidies have exerted considerable downward pressure on the capital expenditure of both the Union and State governments. Public sector capital expenditure is not only important for expanding infrastructure but also crowding in private investment. The share of gross fixed capital formation (GFCF) estimated at only 30.1 per cent of GDP in 2025-26 is still very low.  We should remind ourselves that from 2002, in China, GFCF as a proportion of GDP, has been consistently at  35 per cent or more, reaching as high as 44 per cent in 2013. 

Under Modi, the union government’s capital expenditure has increased manifold from ₹2 trillion in 2014-15 to ₹11.2 trillion in 2025-26 (BE). Budget 2026-27 proposes to increase it to ₹12.2 trillion and continue the momentum. The government also proposes to mitigate risks during infrastructure development and construction, by setting up an Infrastructure risk guarantee fund to provide prudently calibrated partial credit guarantees to lenders. The proposal to set up a Real Estate Investment Trust (REIT) dedicated to central public sector enterprises is also welcome.  This can unlock the value lying idle in their extensive unutilised real estate assets and help ease the scarcity of land available for industr-ialisation in several states. 

The Economic Survey, released before the Union Budget, talks of the entrepreneurial state — “a state that can act before certainty emerges, structures risk rather than avoids it, learns systematically from experimentation, and corrects course without paralysis.” 

In the past, the Asian Tigers and China followed such a model of being entrepreneurial states and are still following it. We see many signs of the Union government following such a path in a cautious way. Examples are Biopharma SHAKTI, India Semiconductor Mission 2.0, the Electronics Components Manufacturing Scheme, dedicated rare earth corridors, and chemical parks. For India, it is an uncharted territory and it will be important to correct course without paralysis when signals emerge of the scheme not working properly. 

---

The author is a Bharatiya Janata Party member of the West Bengal Legislative Assembly and a former chief economic advisor in the Union finance ministry