From Fiscal Arithmetic to Economic Statecraft

As India approaches the Union Budget 2026, much of the public commentary remains focused on familiar markers: headline capital expenditure, the fiscal deficit glide path, and the balance between growth and consolidation. These are not unimportant. But taken on their own, they miss the deeper question this Budget confronts—whether India’s economic institutions are equipped for a decade defined by persistent volatility, technological disruption, climate transition, and a predominantly informal labour market.

The challenges India faces today are no longer episodic or cyclical, but structural. Global volatility, tariff shocks, artificial intelligence–driven disruption, climate stress, weak human capital outcomes, a fraying fiscal federal architecture, thin social safety nets, and a chronically underperforming innovation ecosystem are converging. Together, they expose long-standing weaknesses in how the Indian state raises revenues, prices public goods, allocates expenditure, manages risk, and builds productive capacity.

Budget 2026, therefore, cannot be judged as a routine annual fiscal exercise. It must be read as a strategic signal of whether India is prepared to correct these weaknesses and chart a credible development path for the next decade—one that is resilient to shocks, competitive in global markets, fiscally sustainable, institutionally coherent, socially stabilising, technologically capable, and environmentally viable. The central issue is not whether the Budget is expansionary or conservative, but whether it begins a transition from fiscal arithmetic to economic statecraft.

Governing in an Age of Permanent Volatility
The global economy has entered a phase of persistent instability. Trade is increasingly weaponised, tariff shocks are frequent and unpredictable, capital flows are volatile, and geopolitics intrudes directly into markets. In this environment, macroeconomic resilience itself has become a public good rather than a by-product of growth.

Yet external shocks alone do not explain India’s vulnerability. They reveal domestic weaknesses more starkly. Repeated tariff shocks, for example, show how internal cost structures and governance failures often matter more than external barriers. A credible response requires moving beyond reactive macro management to addressing the internal sources of fragility that amplify external shocks.

Competitiveness Is a Governance Outcome
India’s exposure to tariff shocks reflects long-standing deficiencies in governance and institutional design. Even in the absence of tariffs, Indian firms face higher production and transaction costs than many global competitors. High and opaque power tariffs, distorted land markets, volatile fuel pricing, fragmented logistics, unpredictable raw-material policies, and a compliance regime characterised by complexity and discretion collectively erode competitiveness.

These are not isolated policy failures. They reflect deeper political-economy constraints—cross-subsidisation embedded in pricing structures, regulatory fragmentation, rent-seeking, and weak enforcement capacity. Export competitiveness, therefore, is not primarily about incentives or trade negotiations; it is an outcome of governance quality. Where infrastructure pricing is distorted and regulation is discretionary, firms bear costs that no export promotion scheme can offset.

From Spending More to Spending Better
This diagnosis leads directly to the quality of public expenditure. India’s fiscal debate remains overly focused on spending volumes rather than spending effectiveness. Public expenditure is fragmented across schemes, input-driven rather than outcome-oriented, and weakly linked to productivity gains.

Even rising capital expenditure often suffers from poor appraisal, delayed execution, cost overruns, and weak asset maintenance. Social sector spending frequently fails to translate into commensurate improvements in learning outcomes, health indicators, or employability. Without a decisive shift toward outcome-based budgeting and lifecycle costing of public assets, higher spending will not deliver sustained growth.

Circular Finance as the Missing Fiscal Logic
This is where circular finance must move to the centre of the fiscal architecture. India’s public finance system remains largely linear: the state borrows, builds assets, and locks capital into them for decades. This constrains fiscal space and limits the scale of investment, especially for infrastructure and climate transition.

Circular finance offers an alternative organising logic. By treating public assets as recyclable capital rather than sunk costs, it simultaneously improves expenditure discipline, expands fiscal space, and strengthens State and city balance sheets. Instruments such as Infrastructure Investment Trusts were designed to allow governments to borrow at sovereign rates, create assets, down-sell mature assets to long-term investors, retire debt, and reinvest. When embedded properly, circular finance links revenue strategy and expenditure strategy into a continuous cycle rather than a one-off transaction.

Human Capital and Social Protection as Macroeconomic Foundations
The consequences of weak expenditure quality are most visible in education and health. Poor learning outcomes and uneven healthcare delivery are not welfare failures; they are macroeconomic constraints. A workforce that is poorly educated and unhealthy cannot adapt to AI-driven technological change or sustain productivity growth.

Equally critical is the absence of robust social safety nets in an economy where over 94% of workers are informal. The pandemic was a revealing stress test. MGNREGA emerged as a powerful automatic stabiliser, absorbing millions of workers and sustaining consumption. This experience underscored a basic truth: social safety nets are not merely redistributive tools; they are macroeconomic shock absorbers. Strengthening employment guarantees, credible urban employment schemes, and portable protections for migrant and landless workers should be seen as core macroeconomic infrastructure.

Federalism, Innovation, and the Green Transition
Many of these challenges are compounded by the erosion of fiscal federalism. States and cities are central to competitiveness, social protection, urbanisation, and climate adaptation, yet their fiscal autonomy and the predictability of resource flows have narrowed. The institutional vacuum left after the abolition of the Planning Commission has further weakened analytical neutrality in intergovernmental allocation. Restoring an independent fiscal–investment mediation mechanism would improve predictability, expenditure quality, and macro stability.

India’s fragmented innovation ecosystem adds to this fragility. Public R&D funding remains bureaucratic, private investment is subdued, and competition regulation is insufficiently insulated from influence. Innovation cannot thrive where new entrants fear regulatory capture. The state must move from being a grant-giver to an intelligent buyer and co-developer of technology—particularly in AI applications for education, health, public services, infrastructure, and the justice system—with shared intellectual property and controlled diffusion to promote competition.

All these strands converge in green development—not as a sectoral add-on, but as the integrating framework of macroeconomic strategy. Climate transition will shape capital flows, trade regimes, competitiveness, and employment. Transparent pricing of natural resources, circular finance, innovation-driven public–private partnerships, empowered States, and strong safety nets together make the transition fiscally credible and socially sustainable.

A Budget That Tests State Capacity
Ultimately, Budget 2026 is a test of state capacity. It will matter less for its headline numbers than for the signals it sends—on expenditure quality, pricing reform, competitiveness, social protection, fiscal federalism, innovation, and circular finance.

If it aligns these elements into a coherent strategy, it can mark a shift from incremental budgeting to economic statecraft. If it does not, India will remain vulnerable, regardless of short-term growth numbers.