India’s Budget Settled for Stability, Not Momentum

India’s Union Budget for 2026-27 arrived wrapped in reassuring language on macro stability. The Economic Survey spoke of resilience, fiscal discipline and a declining government debt-to-GDP ratio. The budget arithmetic, however, told a more restrained story.

Instead of reinforcing a fast-growing economy with fiscal momentum, policy settled for caution, allowing growth to carry itself through a phase marked by flattening demand and uneven earnings.

The dissonance was most visible in expenditure projections.

Total spending in 2026-27 was budgeted to grow by just 7.7%, materially below nominal GDP growth of around 10%. For an economy navigating global uncertainty and domestic demand fatigue, this signalled a continued fiscal drag rather than a counter-cyclical push. The caution was not new. Actual spending in 2024-25 undershot revised estimates by 1.4%, reinforcing a pattern of conservative execution whenever revenues fall short.

Such restraint matters because India is no longer in a phase where growth can easily outrun policy tightness. Sales growth has slowed, corporate earnings momentum has softened and private investment remains selective. In this setting, fiscal consolidation, however sensible over the medium term, risks turning pro-cyclical in the near term.

The budget was not devoid of ambition.

Its policy intent marked a shift away from episodic, supply-side interventions toward broader, employment-intensive drivers. Greater emphasis on services, healthcare, tourism and MSMEs acknowledged that job creation, not just capital formation, must anchor the next growth phase. 

Proposals for logistics ecosystems, new railway corridors and inland waterways pointed to a more decentralised development model. The focus on tier-2 and tier-3 cities, alongside plans for chemical parks and rare-earth corridors, suggested an attempt to widen India’s economic geography beyond a few industrial clusters.

These initiatives gave the budget strategic depth, yet their impact remained largely prospective. Most announcements were thin on immediate fiscal heft and short-term demand impulse. They inspired long-term optimism without materially countering current economic headwinds.

The underlying fiscal arithmetic reinforced this sense of inertia. Revenue expenditure net of interest was budgeted to grow by only 4.9% in 2026-27, underscoring limited room for discretionary support. Capital expenditure, long the backbone of the government’s growth strategy, faced pressure from tax shortfalls, with defence allocations absorbing part of the adjustment. Gross tax collections were projected to rise by just 8%, implying a sharp moderation in buoyancy. The most telling assumption lay in indirect taxes, where GST collections were expected to decline by 3%, an implicit acknowledgement of slowing consumption and compliance fatigue.

The fiscal deficit target of 4.3% of GDP for 2026-27 kept the consolidation path intact, though at a gentler pace. Financing relied increasingly on market borrowings, cash drawdowns and outsized dividends from the central bank rather than a revival in tax buoyancy or nominal growth dynamics. From a credibility standpoint, this conservatism reduced near-term fiscal risk. From a growth standpoint, it left little room for upside surprises.

Markets reacted with unease. The hike in securities transaction tax amplified sentiment, yet the deeper concern lay elsewhere. Investors had expected a clearer growth signal at a time when earnings visibility was weakening. What emerged instead was a budget that prioritised balance-sheet optics over macro impulse.

In effect, the budget institutionalised a low-energy equilibrium. It neither reversed consolidation nor decisively accelerated growth. Policy intent appeared progressive, fiscal execution stayed defensive. That combination may preserve stability, yet it risks entrenching a phase of sub-trend momentum.

The official narrative continues to evoke a Goldilocks economy, resilient enough to grow and prudent enough to consolidate. The numbers suggest something less comfortable. Without a stronger fiscal catalyst, growth will be asked to do more of the heavy lifting just as its own engines are beginning to lose steam.