India Budget Not Much of a Surprise

India’s latest Union Budget confirmed a steady, almost deliberately uneventful, approach to fiscal management. The most consequential signal lay not in headline giveaways or sharp expenditure pivots, but in the quiet recalibration of the fiscal anchor.

The government’s explicit shift towards public debt as the guiding metric, with debt projected to decline to around 50% of GDP by 2030-31 from about 56% in 2025-26 and 55.6% in 2026-27, effectively framed the rest of the arithmetic.

Within that framework, the 2026-27 gross fiscal deficit target of 4.3% of GDP landed exactly where expectations had settled. With nominal GDP growth assumed at about 10.5% over the medium term, and 10% pencilled in for the budget year, only modest adjustments to the Centre’s fiscal deficit path are required to engineer a gradual debt decline.

This arithmetic works far less smoothly for states, which lack the same natural debt-reduction lever at fiscal deficits of 3% of GDP or higher.

As debt takes centre stage, the primary deficit becomes a more telling indicator of the underlying fiscal stance. Here, the budget showed incremental restraint rather than a dramatic shift. The primary deficit was budgeted at 0.74% of GDP in 2026-27, marginally lower than 0.8% in the revised estimates for 2025-26, signalling a slow but deliberate tightening once interest costs are stripped out.

On the spending side, revenue expenditure continued to compress relative to the size of the economy. The Centre’s ex-interest revenue expenditure was budgeted to fall to 6.9% of GDP in 2026-27 from 7.3% in the previous year, despite nominal growth of 4.9%. Within this envelope, social sector priorities showed a subtle rebalancing, with education and health outpacing rural development in revenue spending growth.

Capital expenditure remained the budget’s anchor of credibility. The capex-to-revenue expenditure ratio edged up to 0.3 from 0.28, while capital spending once again crossed 3.1% of GDP. Budgeted capex growth of 11.5% was led by defence, railways and road infrastructure. Loans to states for capital expenditure rose further to 0.6% of GDP, or ₹2.7 trillion, from ₹1.7 trillion, extending the Centre’s strategy of nudging state-level investment without fully absorbing it on its own balance sheet.

That said, the near-term capex profile revealed some strain. The government now expects to spend nearly 98% of the 2025-26 capital outlay, implying a sharp contraction in the final quarter after strong year-to-date growth. December capital spending was already down sharply on a year-on-year basis, highlighting execution risks that markets will continue to monitor.

The revenue assumptions were conservative.

With tax buoyancy estimated at just 0.8, gross tax revenues were budgeted to grow by about 8%, leading to a mild decline in the gross tax-to-GDP ratio to 11.2%. Weak goods and services tax growth weighed on the aggregate, while corporate and personal income taxes were projected to grow at steady double-digit rates. The overall tax math appeared credible, aided by the absence of new rate cuts or headline concessions.

Capital gains taxation was left largely untouched, aligning with expectations (but dashing some hopes), though securities transaction tax on derivatives was raised sharply. While this may dent volumes and liquidity at the margin, past experience suggests retail participation has shown resilience to similar measures. Non-tax revenues were supported by expectations of a strong central bank dividend alongside public sector payouts. Disinvestment and other receipts were budgeted at ₹800 billion, implicitly assuming progress on the IDBI transaction and a potential reduction in the government’s stake in a large insurer.

On the financing side, net dated market borrowing was set at ₹11.7 trillion, marginally higher than in the previous year, with gross borrowing at ₹17.2 trillion. Small savings were expected to finance roughly 23% of the fiscal deficit, while net treasury bill issuance was pegged at ₹1.3 trillion. Some technical adjustments in residual financing categories increased reliance on market borrowing, though higher buybacks late in 2025-26 could still ease pressure at the margin.

Beyond the arithmetic, the policy narrative remained consistent. The government reiterated its emphasis on improving productivity, deregulation and sector-specific ease of doing business. Targeted incentives for electronics components, data centres, MSME exports and credit access, along with efforts to correct inverted duty structures, reinforced a reform agenda that has increasingly favoured incremental fixes over grand announcements.

In that sense, the budget’s restraint was its message.

With growth holding up and fiscal credibility largely intact, the government chose to stay the course. Asset monetisation, strategic disinvestment and better resource allocation remain the least growth-impinging routes to consolidation, and the budget leaned on all three without overpromising on any. For markets, the absence of surprises may itself be the most reassuring signal.