Union Budget 2026-27: Business as usual with capex push, modest fiscal consolidation and risks

India’s budget speeches often tend to disappoint, especially those with unfailing optimism that envisage ‘historic’ or ‘game-changing announcements’. But the disappointment may be the folly of unrealistic expectations, hoping for a budget that will include everything from a clear long-term plan for the economy to mega tax cuts for industry and individuals. But budgeting is about finding the right balance between various pulls and pressures and articulating the basics of government finances. From that perspective, this budget was business as usual. Fiscal consolidation has been slightly more moderate than many expected; The fiscal deficit fell from 4.4% of GDP to 4.3%, leaving the debt-to-GDP ratio at 55.6%, slightly above the forecasters’ consensus of 55.6%. GoI plans to spend ₹12.2 lakh crore in 2026-27 on capital expenditure, up from ₹10.9 lakh crore in 2025-26. This recognizes that the GoI cannot afford to let go of gas too quickly, with elusive private investments and geopolitical risks hanging over exports.

The 2026-27 nominal GDP growth supporting the budget is conservatively assumed to be 10%. There’s probably a plus to this. The GoI will borrow ₹11.7 billion on net to finance its deficit – a marginal increase from this year’s ₹11.3 billion, adjusting for repayment of debt due in the next financial year, as it relies heavily on small savings to finance the rest.

The budget’s industrial strategy tries to achieve 3 things:

∙ Leave the electronics sector on its back, which causes an increase in the export burden by spending more on the program.

∙ Combat the damage caused by Trump’s increased tariffs on labor-intensive sectors such as textiles and SMEs.

∙ Risk critical supply chains such as rare earths, chemicals and semiconductors by encouraging domestic production.

So what are the risks?

∙ Fiscal balances are being shaken. Increasing fiscal imbalances in the states and the resulting need for borrowing from the market continue to be a source of concern. Despite some reassuring borrowing forecast for the centre, states’ cash calls on bond and money markets could potentially ‘crowd out’ others by pushing up interest rates. ∙ Rural wind Migration from MNREGA to VB G-RAM-G due to centrally funded projects poses a risk in the near term. The new program guarantees 120 days instead of the previous 100 days. Although the budget allocation for 2026-27 appears adequate, the transition to this completely restructured program, combined with the significantly reduced role of local institutions in determining employment and the increased financial burden on states, poses a risk. If migration is not seamless or states face financing challenges, this could impact rural consumer demand and overall growth.

∙ Mega City, Maha Neglect? The budget ignores the deterioration of quality of life in megacities; The most visible problem is air pollution. It prefers to focus on smaller cities through its financial allocations.

∙ Mega cities are not just collections of homes and offices. These are vital networks that foster innovation and investment. The decision to live in the city depends on bringing in capital and local production. It is appreciated that city management is under the jurisdiction of the states. But it is time for the center to step in to address the issue of ‘livability’ of India’s metros.

While the GoI has been successful in creating both physical and digital infrastructure, India lags behind in innovation. India needs to remain competitive not only in adopting AI and renewable technologies but also in establishing a solid foundation in their value chain. GoI needs to think about the quality of capex and prioritize R&D spending. We hope the next budget will fulfill some of these wishes.