Meenakshi Rajeev
meenakshi.rajeev@iitjammu.ac.in
The Budget 2026-27 is presented at a time when the Indian economy is on a relatively strong growth trajectory, accompanied by a low inflation environment. Headline inflation eased to around 1.33 per cent in December 2025, creating space for the Reserve Bank of India to adopt an expansionary monetary stance. This easing of inflation and expansionary monetary policy with the lowering of interest rates has supported consumption demand and, in turn, reinforced overall GDP growth. The First Advance Estimates (FAE) for FY26 released by the Ministry of Statistics and Programme Implementation (MoSPI) place real GDP growth at 7.4 per cent, reaffirming India’s position as one of the fastest-growing major economies.
Sectoral performance during the second quarter of FY26 as well reflects broad-based growth. Gross Value Added (GVA) data indicate that agriculture grew by 3.5 per cent, manufacturing by 7.9 per cent, and services by 9 per cent, suggesting satisfactory momentum across all three major sectors of the economy. On the demand side, domestic demand continues to anchor growth, supported by a strengthening pace of capital formation. According to the RBI data, the share of Private Final Consumption Expenditure (PFCE) in GDP rose to 61.5 per cent in FY26, the highest level since FY12. High-frequency indicators for the third quarter of FY26-including automobile and tractor sales and air passenger traffic-also signal the persistence of robust demand conditions. Given the robustness of domestic demand, a reduction in income tax was not anticipated and has not been announced as well.
Despite these positives, several concerns remain. The share of manufacturing in GDP continues to be modest at 12.8 per cent, well below the desired level for a structurally balanced economy. External trade has emerged as a drag on growth, with the Reserve Bank of India noting a widening merchandise trade deficit, which rose to a record USD 25 billion. This reflects faster growth in imports relative to exports in December 2025. Additionally, the depreciation of the rupee has raised concerns regarding rising import costs and external payment pressures. These mixed signals underscore the importance of sustaining economic momentum at this critical juncture.
Against a backdrop of heightened global uncertainty, the Budget places strong emphasis on infrastructure investment as a means of strengthening domestic growth and advancing India’s aspiration of becoming a Viksit Bharat. At the same time, the government has continued its commitment to fiscal consolidation. As highlighted in the Economic Survey 2026, the fiscal deficit declined sharply from 9.2 per cent of GDP in FY21 to 4.8 per cent in FY25. Over this period, the revenue deficit has narrowed steadily to its lowest level since FY09, creating greater fiscal space for capital expenditure and reflecting an improvement in the quality of public spending. The decline in the primary deficit-to-GDP ratio further indicates that incremental borrowings are increasingly being used to service past liabilities rather than finance current expenditure. In the current budget the fiscal deficit for 2026-27 is projected at 4.3 per cent of GDP. This reflects adherence to the medium-term fiscal prudence framework and debt consolidation objectives.
An important institutional innovation by the Government is the adoption of behavioural economics through the NUDGE (Non-Intrusive Usage of Data to Guide and Enable) approach by the Income Tax Department. As the economic survey mentions, by relying on data-driven nudges rather than coercive enforcement, the department has achieved notable success. For instance, the Foreign Asset Campaign led nearly 25,000 taxpayers to revise their returns, with over 61 per cent responding positively. This resulted in the disclosure of foreign assets worth more than Rs 29,000 crore and foreign income exceeding Rs 1,000 crore, much of it through belated filings.
With fiscal consolidation, the budget presented by the Finance Minister rightly emphasised on the infrastructure and capital investment. Public capital expenditure has increased significantly from Rs 2 lakh crore in FY2014-15 to Rs 11.2 lakh crore in BE 2025-26, and is proposed in this budget to be further raised to Rs 12.2 lakh crore in FY2026-27. To mitigate risks faced by private developers during the infrastructure development phase, the government has proposed setting up an Infrastructure Risk Guarantee Fund to provide partial credit guarantees to lenders. This will perhaps help the financial institutions mitigate the risks of the non-performing assets while lending for such long duration high value projects.
The Budget also prioritises environmentally sustainable logistics through initiatives such as new Dedicated Freight Corridors, the operationalisation of 20 additional National Waterways, and a Coastal Cargo Promotion Scheme aimed at increasing the share of inland waterways and coastal shipping to 12 per cent by 2047. These measures are expected to generate employment, build specialised skills, and reduce logistics costs.
One of the major emphases of the Finance Minister’s Budget speech is the development of Tier II and Tier III cities. With large metropolitan cities increasingly getting saturated and environmental pressures mounting, this strategic shift is a welcome move-especially for Union Territories such as Jammu and Kashmir, where smaller cities dominate the urban landscape. As stated by the Finance Minister, the government will continue to focus on developing infrastructure in cities with populations exceeding five lakh, which have emerged as new growth centres. To this end, City Economic Regions (CERs) will be created, particularly focusing on Tier II and Tier III cities and temple towns requiring modern infrastructure and basic amenities. An allocation of Rs 5,000 crore per CER over five years has been proposed to implement region-specific development plans, which states can take advantage of to develop smaller towns or cities.
However, for India to truly achieve the goal of a Viksit Bharat, growth must be broad-based and inclusive. This necessitates renewed attention to the agriculture and the informal sectors, that is, to both farm and non-farm. Credit is a critical component for these sectors, and we observe in this budget that schemes such as interest subvention for credit to farmers continue with an allocation of Rs 22,600 crore. This remains unchanged from the previous year. Similarly, the allocation for the Pradhan Mantri Fasal Bima Yojana has marginally declined to Rs 12,200 crore. Farmer producer organisation head also saw an allocation of Rs 500 crore, slightly lower than the previous year. Allocation to the crop husbandry sector remained unchanged at Rs 76387 crore, and allocation to the MNREGA has declined. Adjusted for inflation, these allocations effectively imply a contraction in real terms. The unorganised (manufacturing, trade and other services) sector, which remains the second-largest employer in the economy, continues to face constraints in access to credit, technology, and digital platforms, as evidenced by the Unorganised Sector Survey data. Notably, there are programmes for the agriculture and small-scale industries sector announced in this budget, which may help these sectors. In this context, the High-Level Committee on Banking for Viksit Bharat announced in this budget is expected to play a crucial role in addressing these structural challenges and steering the economy towards a more inclusive growth path, where the sectors earning lower per capita income and employing the bulk of the population can flourish.
(The author is Professor of Economics, IIT Jammu)
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