Whereas presenting the Union Funds for 2026-27, a good portion of the Finance Minister’s funds speech handled the expenditure applications to be launched to allow India to develop by 2047. It’s comprehensible that there’s a explicit deal with cutting-edge know-how areas akin to synthetic intelligence, biopharmaceuticals, semiconductors, and important minerals. Considerations about these spending applications lie in how nicely they are going to be applied and the tempo at which they’ll be capable to obtain the Vikshit Bharat objectives.
Expenditure priorities and earnings outlook
To offer fiscal house for these altering priorities, the Indian authorities has been significantly profitable in restructuring its income expenditure. For greater than a decade, the share of income expenditure in whole expenditure has continued to say no, from 88% in 2014-15 to roughly 77% (BE) in 2026-27, a decline of 11 share factors. Of this quantity, the lower in central subsidies was 7 share factors of whole expenditures. The proportion of capital expenditures in whole expenditures elevated accordingly.
The Middle focuses on capital expenditure and has performed an essential function in supporting GDP progress. The Centre’s capital expenditure as a share of GDP is on the highest stage within the post-COVID-19 years. Nonetheless, its annual progress fee has declined over time. Due to this fact, from the latest peak progress fee of 28.3% in 2023-24, it declined to 10.8% in 2024-25 and 4.2% in 2025-26 (RE). It’s at present budgeted to extend to 11.5% (BE) in 2026-27, which is barely barely increased than the assumed nominal GDP progress fee of 10.0%. Due to this fact, it would stay roughly flat at 3.1% of GDP in 2025-26 (RE) and 2026-27 (BE). It might be famous that the deliberate capital expenditure progress from 2025 to 2026 was 10.1%, however as already talked about, solely a 4.2% progress was achieved.
The Authorities of India’s income assortment, particularly tax income projections for 2026-2027 (BE), are prudent and prone to be achieved. Nonetheless, what’s worrying is that the Centre’s gross tax income (BE) buoyancy for 2026-2027 has declined to 0.8, nicely under the benchmark of 1. This consists of a direct tax buoyancy of 1.1, which accounts for 61.2% of the Centre’s whole taxes, and an oblique tax buoyancy of 0.3, which accounts for 38.8% of the Centre’s whole taxes. earnings. The primary motive for the general decline in buoyancy is said to Items and Providers Tax (GST) collections, that are anticipated to fail to maintain up with GDP progress in 2026-27 (BE). Given the growing strain on spending on each improvement and welfare, the federal government ought to take an in depth take a look at the oblique tax construction and enhance its buoyancy to 1.
The suggestions of the sixteenth Finance Fee (FC16) don’t present for any change within the share of states within the divisible central tax pool, protecting it at 41%.
Due to this fact, the tax allocation to states stays unchanged at 3.9% of GDP in 2025-26 (RE) and 2026-27 (BE). FC16 additionally didn’t suggest income shortfall grants or sectoral/state-specific grants. The abolition of the income shortfall subsidy will lead to decrease total transfers to states in comparison with FC15. In actual fact, different parts of the FC subsidy have additionally been decreased, which is why the entire FC subsidy to states has decreased from 0.43% of GDP in 2025-26 (RE), the final 12 months underneath the FC15 advice, to 0.33% of GDP in 2026-27 (BE), the primary 12 months underneath the FC16 advice. Grant quantities sometimes enhance considerably through the first 12 months of an FC award interval.
Tempo of fiscal consolidation
The slowing tempo of fiscal consolidation can also be a significant trigger for concern. The tempo of discount within the fiscal deficit as a share of GDP has been regularly reducing for the reason that coronavirus outbreak. Contemplating the interval 2023-2024, the sequential annual lower on this ratio was 0.7 share factors in 2024-2025, 0.4 share factors in 2025-2026 (RE), and solely 0.1 share factors in 2026-27 (BE). The change in focusing on technique from a funds deficit to a debt-to-GDP ratio goal additionally doesn’t encourage a lot confidence. In actual fact, the debt-to-GDP ratio and the fiscal deficit-to-GDP ratio are interdependent and transfer in tandem with nominal GDP progress.
A clear technique can be to indicate the relative traits within the debt-to-GDP ratio and financial deficit relative to GDP, primarily based on the basic assumption of nominal GDP progress over the subsequent 5 years. It must also point out when every of the objectives promised within the Fiscal Accountability and Funds Administration Act of 2018, specifically a 40% debt-to-GDP ratio and a 3% deficit-to-GDP ratio, is prone to be achieved.
It’s also helpful to notice that sustaining an excessively excessive debt-to-GDP ratio will lead to a excessive ratio of curiosity funds to curiosity earnings. The efficient rate of interest on central authorities debt is estimated to be 7.12% in 2026-2027 (BE). This fee has regularly elevated over the previous three years. In actual fact, in line with 2026-27 (BE), the interest-to-income ratio is near 40%, thereby squeezing house for needed primary expenditures.
It should be emphasised that there’s a sturdy logic behind the fiscal deficit restrict of three% of GDP. If the nationwide authorities and states accounted for 8% to 9% of GDP, investable sources accessible to the non-public sector can be considerably decreased. Underneath these circumstances, it’s tough to count on a restoration in non-public funding.
good framework
Taken collectively, this funds presents a superb roadmap to attaining developed nation standing by 2047. This funds highlights key areas for the federal government and the nation to deal with. Sustained progress requires monetary and financial stability. It’s essential to evaluate the trail to fiscal consolidation.
C. Rangarajan is the Chairman of the Madras Faculty of Economics and former Governor of the Reserve Financial institution of India. DK Srivastava is a member of the advisory committee of the sixteenth Finance Fee and a former director of the Madras Faculty of Economics. The views expressed are private
issued – February 5, 2026 12:16am IST
