The Budget and the imperative of fiscal consolidation Premium

The Budget presents a good road map to achieve the status of a developed country by 2047 and has highlighted the critical areas where the government and country must focus on

While presenting the Union Budget 2026-27, a considerable part of the Finance Minister’s Budget speech dealt with the expenditure programmes that will be launched to enable India to become developed by 2047. The emphasis on the advanced technology sectors such as Artificial Intelligence, biopharma, semiconductor and critical minerals among others, is well taken. The concern with these expenditure programmes is on how well they are going to be implemented and the pace at which they will enable the goal of Viksit Bharat to be achieved.

In order to provide fiscal space for these changing priorities, the Government of India has been successfully undertaking a restructuring, particularly of its revenue expenditures. For more than a decade, the share of revenue expenditure to total expenditure has been going down, from 88% in 2014-15 to about 77% in 2026-27 (BE), that is a fall of 11% points. Within this, the fall in central subsidies was 7% points of total expenditure. Correspondingly, the share of capital expenditure in total expenditure has increased.

The Centre’s emphasis on capital expenditure has played an important role in supporting GDP growth. As a percentage of GDP, the Centre’s capital expenditure, in the post-COVID-19 years, has been at a high level. However, its annual growth rate has fallen over time. Thus, from a recent peak growth of 28.3% in 2023-24, it fell to 10.8% in 2024-25 and to 4.2% in 2025-26 (RE). It is budgeted to increase now to 11.5% in 2026-27 (BE), which is only marginally higher than the assumed nominal GDP growth of 10.0%. Thus, it will almost remain static at 3.1% of GDP in 2025-26 (RE) and 2026-27 (BE). It may be noted that the budgeted capital expenditure growth in 2025-26 was 10.1%, but a growth of only 4.2% was achieved as already noted.

The Government of India’s revenue receipts, particularly projections for 2026-27 (BE) of tax revenues are cautious and are likely to be achieved. But the concern is that the buoyancy of Centre’s gross tax revenues in 2026-27 (BE) has fallen to 0.8, well below the benchmark of 1. This consists of a buoyancy of 1.1 of direct taxes, which has a share of 61.2%, and a buoyancy of 0.3 of indirect taxes, which has a share of 38.8% in Centre’s gross tax revenues. The main reason for the lower overall buoyancy is linked to the Goods and Services Tax (GST) collections, which are not expected to keep pace with GDP growth in 2026-27 (BE). In view of the high pressure on increasing expenditure, both developmental and welfare, the government should take a good look at the indirect taxes structure and raise their buoyancy to 1.

The recommendations of the Sixteenth Finance Commission (FC16) have not provided for any change in the share of States in the divisible pool of central taxes, keeping it at 41%.

The assignment of taxes to the States, therefore, has remained the same at 3.9% of GDP in 2025-26 (RE) and 2026-27 (BE). Also, the FC16 did not recommend any revenue deficit grants or sector/State-specific grants. Because of discontinuation of revenue deficit grants, there would be a reduction in the overall transfers to the States as compared to FC15. In fact, there has also been a reduction in other components of FC grants — the reason why total FC grants to the States have fallen from 0.43% of GDP in 2025-26 (RE) — the last year under the recommendations of FC15 — to 0.33% in 2026-27 (BE), the first year under the recommendations of the FC16. Usually, in the first year of an FC award period, there is a step jump in the volume of grants.