A Budget for uncertain times: Modest fiscal path, services-led growth

FM goes for modest fiscal consolidation, while focusing on services and state capex for growth

The Union Budget for 2026-27 has been presented amid unprecedented geoeconomic turbulence. India’s economic growth remained strong at 7.4 per cent, but the Budget would have its work cut out to sustain that. The government’s approach over the past several years has been to utilise public investment as a growth-generating measure. Infrastructure spending this year is due to rise to ₹12.2 trillion over 2026-27, a considerable acceleration. This is accompanied by an enhanced vision for the next set of big infrastructure projects. These are a series of new high-speed rail links connecting various hubs of growth, particularly in South India; new dedicated freight corridors that work on an east-west axis; coastal cargo to take some of the pressure off the railways and highways; and 20 new national waterways meant to easily move mineral wealth from the interior to ports. It is worth noting that a significant proportion of the additional capital expenditure is in the form of an increase in interest-free loans provided to states for their own investment. 

However, private investment in factories and projects has not responded to public investment and job growth has been limited. While there have been some undoubted successes for the government’s manufacturing push — Union Finance Minister Nirmala Sitharaman announced that a second iteration of the India Semiconductor Mission would be initiated, and the Electronics Components Manufacturing Scheme would see its outlay increased to ₹40,000 crore from ₹23,000 crore — “Make in India” continues to face significant headwinds, including ongoing trade tensions. 

The Budget this time had a considerable focus on services. It proposed a high-powered committee that would look at employment and output in the services sector from “education to employment and enterprise”. Several specific services verticals — including information technology-enabled services, tourism, health and veterinary care, social care, and the creative sector — were given supportive schemes from budgetary allocations for new centres of excellence to subsidy support for new institutions. 

This shift may reflect a broader concern in government about the limited nature of private investment in new manufacturing, the increasing capital intensity of any new factories, as well as worries about global market access, and both tariff and non-tariff barriers for Indian goods. The services sector faces none of these issues. It does, however, require higher skills in the workforce — closing this gap appears to be the underlying theme of this panoply of new measures. It is legitimate to ask, however, whether the revolution in artificial intelligence will greatly impact job creation in these sectors just as the government shifts its attention to them. 

The other major plank of the current government’s economic policy, aside from capital expenditure, has been fiscal restraint. Here the Budget provides observers with somewhat contradictory impulses. This is the first year that the formal target has shifted from the fiscal deficit to the debt-to-gross domestic product (GDP) ratio, which has been redesignated “operational instrument for debt targeting”. This complicates analysis somewhat, as now the future path of GDP becomes even more important. The Budget assumes a nominal growth rate of 10 per cent next year, a little higher than this year — the built-in assumption is that the consumer price index-based inflation rate will be a little higher this year. 

As a consequence, the finance minister can promise to bring the debt-to-GDP ratio down marginally from 56.1 per cent of GDP this year to 55.6 per cent in 2026-27. This is a slower pace than was expected or is possible. The fiscal deficit will go down from 4.4 per cent of GDP to 4.3 per cent. These are small changes, but represent a significant shift from the past attitude to fiscal consolidation. 

Whether this was the right year to decelerate is an open question. On the one hand, there are significant global pressures, and the minister might prefer not to shock the system when some systems, such as goods and services tax receipts, are flashing red. On the other, the debt mathematics is adverse, given the tranches of past borrowing that will mature this year. While net borrowing rises only modestly, gross market borrowing will increase sharply to ₹17.2 trillion, up from ₹14.6 trillion. This will naturally stress bond markets considerably, and create a structural drag on yields and rates. 

As far as the regular investor, small businessperson, and consumer are concerned, however, the focus of government action remains easing mechanisms and governance. This is welcome, and in keeping with its years-long “ease of living” approach. Actions promised in the Budget are an expansion of the use of TReDS (trade receivables discounting system) for smaller companies; the decriminalisation of several tax offences and the granting of immunity for some oversights, including for foreign assets; promises of new approach to Customs based on trust; and revising duty-free allowances for personal travel. One thing that has been tightened, however, is securities transaction tax on futures and options. Some major market participants are worried that this will reduce liquidity — but the fact is that retail traders were getting over-involved in these complex transactions, and some action to push back against the gamification of futures and options was necessary. 

Overall, this Budget bets that slower consolidation, state capex, and a push to services will keep growth going.