The Arithmetic of Restraint

The Union Budget shuns pre-election excess in favour of a slower, sturdier march towards fiscal credibility.

Among other things, the Union Budget for 2026–27 announced on February 1 was notable for its restraint. With key assembly elections looming in West Bengal, Tamil Nadu, Kerala and Assam, one would have thought that the Central government would have yielded to the familiar temptations of fiscal largesse. Instead, the budget reads like an exercise in self-denial. While populism is present, it is muted.

In fact, the budget signals a quiet but consequential shift in India’s fiscal culture, from headline-grabbing giveaways to a more technocratic pursuit of macroeconomic stability.

Strategic Resilience

That tone was set by the Economic Survey for 2025–26, which cast India as an economy of “strategic resilience.” Strong domestic demand, it argued, had created the policy space to think beyond short-term stimulus and towards longer-term reform. The budget takes that cue seriously. Its fiscal arithmetic is built on a conservative assumption of 10 percent nominal GDP growth, which is reassuringly realistic after years of post-pandemic volatility. Credibility, rather than bravado, has been the budget’s governing instinct.

On the revenue side, the numbers tell a story of gradual formalisation. Total non-debt receipts for 2026–27 are budgeted at Rs. 36.5 trillion, a rise of 7.2 percent over the revised estimates of the previous year. Gross tax revenue is projected to climb by 8 percent to Rs. 44 trillion. Direct taxes remain the backbone, contributing roughly 61 percent of gross collections. Personal income tax continues to outpace corporate tax, reflecting both improved compliance and a structural shift in the tax base.

Yet this imbalance raises an uncomfortable question. Direct tax receipts are expected to rise by 11 percent, with personal income tax carrying much of the load. That optimism sits uneasily against the fact that revised estimates for personal income tax in 2025–26 were actually 5 percent lower than the previous year’s outturns. With corporate profits robust, the growing burden on individuals risks eroding domestic consumption, the very pillar of resilience the Survey celebrates.

Indirect taxes offer fewer surprises. The full-year impact of GST 2.0 is visible, though receipts for 2026–27 are marginally lower than the revised estimates of the previous year. Customs duties are flat, excise duties modestly higher. The government has accepted the 16th Finance Commission’s recommendation to retain the states’ share of the divisible tax pool at 41 percent, pushing total transfers to states and Union Territories to Rs. 26.2 trillion. Net tax revenue to the Centre rises a steady 7.2 percent, reinforcing the impression of cautious consolidation.

Realistic Options

If tax revenues show strength, non-tax revenues expose fragility. At Rs. 6.66 trillion, they are broadly unchanged, but nearly half comes from a single source: the Reserve Bank of India’s dividend. Non-oil public-sector enterprises contribute barely a sliver. This dependence on the central bank is convenient but unhealthy, masking weak PSU performance and dulling incentives for reform. A stable headline can still conceal a hollow core.

Disinvestment was flagged by the Economic Survey as a crucial lever for asset monetisation. The budget’s follow-through is less convincing. The government has set a lofty target of Rs. 80,000 crore for 2026–27 - more than double last year’s - but its own track record invites scepticism. Success hinges on politically sensitive transactions such as IDBI Bank and LIC stake sales, as well as the monetisation of public-sector real estate through REITs and InvITs. With outright privatisation still constrained by politics and markets alike, squeezing value from existing assets looks the more realistic, if less glamorous, option.

On the spending side, restraint again dominates. Revenue expenditure is budgeted at Rs. 41.25 trillion, up 6.6 percent, but the composition is rigid. Non-discretionary items - salaries, pensions and interest payments - absorb roughly two-thirds of revenue receipts. Interest payments alone, at Rs. 14 trillion, account for more than a quarter of total expenditure and are growing at over 10 percent annually.

Subsidies offer one of the few areas of compression. The overall bill falls by 4.5 percent to Rs. 4.1 trillion, helped by lower fertiliser costs and modest reductions in petroleum support. Food subsidies, however, remain stubbornly high, reflecting the permanence of the PMGKAY free ration scheme for 81 crore beneficiaries. Welfare, once expanded, is politically difficult to retrench.

Rural Recalibration

There is, nevertheless, a notable recalibration in rural policy. The new VBGRAM G scheme replaces the core component of MGNREGA, extending guaranteed work to 120 days while shifting greater fiscal responsibility to states. Funding for traditional MGNREGA falls sharply. At the same time, flagship programmes regain momentum. The emphasis is shifting from sheer expenditure to delivery and durability.

Capital expenditure remains the budget’s centrepiece. At Rs. 12.2 trillion, it is a far cry from the Rs. 2 trillion spent in 2014–15. Including grants for capital assets, effective capex rises to Rs. 17.15 trillion, which is 4.4 percent of GDP. For the first time, effective capex exceeds the fiscal deficit itself, a telling improvement in the quality of the deficit. Borrowing is increasingly used to build assets rather than to fund consumption, bolstering long-term growth prospects.

Fiscal consolidation continues, albeit at a gentler pace. The deficit has narrowed marginally to 4.3 percent of GDP. The primary deficit has fallen sharply, signalling progress, even if past experience cautions against taking budgeted figures at face value. More significant is the government’s adoption of the debt-to-GDP ratio as its primary fiscal anchor, with a target of 50 percent by 2031. At 55.6 percent, India is edging closer to global comfort zones, though success depends on sustaining robust growth and persuading states - many of them fiscally lax - to follow suit.

Taken together, Budget 2026–27 marks a turn towards fiscal adulthood. With geopolitical uncertainties easing and domestic demand holding firm, the government has chosen to shore up its foundations before attempting leaps. It is not a budget that excites, but it is one that reassures.

(The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)