India’s Fiscal Crossroads, Navigating the Triple Imperative of Sustainability, Equality, and Growth in the 2026-27 Union Budget
As India prepares to unveil its Union Budget for the fiscal year 2026-27, the nation stands at a pivotal economic juncture. The aspirations of its 1.46 billion citizens are vast and varied, yet the fiscal reality demands not a scattershot approach, but a surgical focus on a few core imperatives. As articulated by former RBI Executive Director Mridul Saggar, the forthcoming budget faces a formidable triad of objectives: cementing hard-won fiscal sustainability, directly confronting alarming income and wealth inequalities, and accomplishing both without derailing the economy from a sustainable high-growth trajectory. Achieving this “holy trinity” is the defining challenge for India’s economic policymakers, a task that will require not incremental tinkering, but a strategic reimagining of the state’s fiscal role and a bold reallocation of resources from consumption to capacity-building.
The First Pillar: Fortifying Fiscal Credibility and Resilience
India’s fiscal story over the past five years is one of commendable consolidation, emerging from the pandemic’s abyss. The budgeted Gross Fiscal Deficit (GFD) to GDP ratio for 2025-26 is poised to be met, marking a compression of 4.8 percentage points from the 2020-21 pandemic high. Even more striking is the projected primary revenue surplus of 2.1% of GDP, a feat rivaled only by the fiscal discipline of the FRBM era in 2007-08. This consolidation has begun to reduce central government liabilities, building a crucial buffer of credibility.
For Budget 2026-27, the imperative is clear: stay the course. Saggar rightly argues for targeting a GFD/GDP ratio of 4.2% or lower. This is not austerity for its own sake, but strategic prudence with multiple payoffs:
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Monetary- Fiscal Synergy: Persistent government borrowing, compounded by increasing state debt (up from 28.4% to 29.2% of GDP in 2025-26), has kept bond yields firm, transmitting into higher lending rates and crowding out private investment. Credible consolidation can soften yields, lowering the cost of capital for businesses and households, thereby stimulating investment-led growth.
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Creating Policy Space: The global outlook remains fraught with geopolitical conflicts (the “grey swan” events Saggar mentions) and potential economic shocks. A strong fiscal position is the nation’s insurance policy, creating the space to deploy counter-cyclical stimulus in a downturn or ramp up security spending without triggering a debt crisis. It is the foundation of strategic autonomy.
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Signaling to Global Institutions: A steadfast commitment to consolidation could be the final nudge needed for global rating agencies to upgrade India’s sovereign outlook from “stable” to “positive,” lowering external borrowing costs and attracting long-term foreign investment.
However, this path is threatened by looming fiscal risks. The 2027-28 and 2028-29 budgets will bear the immense burden of implementing Pay Commission awards with accumulated arrears, a known liability that current cash accounting conveniently obscures. The 2028-29 budget will also face the pressures of the political cycle ahead of general elections. Therefore, the 2026-27 budget is the last, best chance to lock in structural gains before these predictable shocks hit. A failure to consolidate now would severely undermine the medium-term target of reducing central government debt to the pre-pandemic level of 50% of GDP by 2031 (from ~56.1% today), eroding hard-earned credibility.
The Second Pillar: Confronting the Inequality Leviathan
While fiscal consolidation is a macroeconomic necessity, it cannot be pursued in a social vacuum. India’s growth story is shadowed by a stark and worsening inequality crisis. The recently released World Inequality Report, using the Arias-Osorio (2025) methodology, reveals a staggering concentration: the top 1% of Indians own about 40.1% of total personal wealth, and the top 10% control 65%. These levels are approximately double those of most OECD nations, painting a picture of an economy where the fruits of growth are captured disproportionately at the apex.
Past approaches—while well-intentioned—have proven inadequate. Flagship welfare programmes providing cheap food, employment guarantees, and health insurance have built essential social safety nets and alleviated absolute deprivation, but they have not dented the structural architecture of inequality. They address symptoms, not causes. The roots lie in opportunity inequalities, inadequate human capital formation for the masses, and a tax-and-transfer system that has been insufficiently progressive.
The budget must pivot to use fiscal policy as a direct, powerful tool for redistribution, grounded in the Keynesian insight that the economic multiplier effect is heightened when income is redistributed to those with a higher marginal propensity to consume (MPC). This means:
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Progressive Taxation Re-examination: A serious review of wealth, inheritance, and capital gains taxes is overdue. The goal is not to punish success or stifle investment, but to ensure the ultra-wealthy contribute proportionately to the society that enables their wealth. The design must be sophisticated to avoid capital flight but must signal a commitment to equity.
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Data-Driven Policy: As Saggar notes, India’s statistical authorities must urgently develop comprehensive panel data to study the heterogeneous impacts of fiscal policy. We cannot effectively target inequality without understanding precisely how different policies affect different income and social groups over time.
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Investing in Equality of Opportunity: The most potent long-term weapon against inequality is investment in universal quality education, skill development, and healthcare. Redirecting expenditure towards these areas builds human capital for the many, rather than subsidizing consumption or providing indirect benefits that often accrue to the affluent.
The Third Pillar: The Growth Engine – Shifting from Consumption to Investment
The central thesis of Saggar’s argument—and the key to unlocking the “holy trinity”—is that the budget must execute a fundamental disconnect from the past by radically reallocating spending. The current mix is suboptimal for sustainable, equitable growth. The path forward involves a decisive shift from revenue expenditure to capital expenditure (capex).
The logic is compellingly supported by multipliers: revenue spending or blanket tax cuts have a near-neutral multiplier effect. In contrast, productive public capex has a multiplier of 2 to 2.5. When the government builds a freight corridor, a green energy park, or digital infrastructure, it does three things simultaneously:
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Creates Immediate Demand: It generates jobs and purchases materials.
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Builds Productive Capacity: It enhances the economy’s long-term potential output and efficiency.
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Crowds-In Private Investment: It de-risks sectors, provides complementary infrastructure, and signals long-term commitment, thereby catalyzing private capex that might otherwise be stalled by uncertainty.
Therefore, the budget’s growth strategy should be unequivocally investment-led. This means:
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“Radically Cutting Revenue Spending by Downsizing Government”: This is a politically challenging but economically vital prescription. It implies rationalizing subsidies (particularly non-merit, inefficient ones), streamlining bureaucracy, and improving the efficiency of existing welfare delivery to free up resources for capex.
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Stepping Up Quality Capex: Not all public investment is equal. The focus must be on high-multiplier, growth-enhancing projects in logistics, energy transition, and technology, with rigorous project monitoring to prevent time and cost overruns.
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Derisking Private Projects: Using tools like viability gap funding, providing clearer land and environmental clearances, and considering the reintroduction of accelerated depreciation benefits can significantly boost animal spirits in the private sector.
The Synthesis: Is the “Holy Trinity” Attainable?
The critical question Saggar poses is whether targeting growth, consolidation, and equity simultaneously is an “impossible trinity.” The answer lies in recognizing that budgets have non-linear outcomes determined by the policy mix and balance.
A budget that merely cuts spending across the board to reduce the deficit would harm growth and exacerbate inequality. Conversely, a budget that spends lavishly on populist revenue schemes might provide a short-term consumption boost but would wreck fiscal sustainability and fail to create lasting jobs or assets.
The viable synthesis is the investment-led consolidation and redistribution model. By downsizing inefficient revenue expenditure and reallocating those savings—along with the proceeds from progressive taxation—into high-quality public investment and human capital development, the budget can achieve a virtuous cycle:
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Fiscal Consolidation: Achieved via spending reallocation, not blunt cuts.
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Sustainable Growth: Fueled by the high multiplier of capex and crowd-in private investment.
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Reduced Inequality: Addressed through progressive taxation funding universal public goods (education, health) and creating mass, quality employment in construction and new industries.
Conclusion: A Budget of Strategic Reallocation
The Union Budget 2026-27 cannot be a document of appeasement or scattered promises. It must be a strategic blueprint for India’s next phase of development. Mridul Saggar’s framework provides a clear roadmap: use this critical window before future fiscal shocks to double down on credibility; directly tackle the inequality crisis with smart, progressive fiscal tools; and ignite an investment boom by courageously shifting national resources from unproductive consumption to productive capacity-building.
This is a budget that requires political courage to reform the state’s own size and functions, intellectual courage to redesign the social contract through taxation, and administrative courage to execute complex projects efficiently. If it succeeds in striking this delicate balance, it will not just be a good budget for a year; it will lay the foundation for a more resilient, equitable, and prosperous Indian economy for the decade to come. The nation waits to see if its finance managers can rise to the challenge of this triple imperative.
Q&A: Understanding the Imperatives for India’s 2026-27 Union Budget
Q1: Why is fiscal consolidation in the 2026-27 Budget described as strategically crucial, even though the deficit has already improved?
A1: While the fiscal deficit has improved from pandemic highs, consolidation in the 2026-27 Budget is critical for three strategic reasons. First, it is the last clear window before predictable, large fiscal shocks hit—namely, the implementation of Pay Commission awards with arrears in subsequent budgets and the pressures of the political cycle ahead of the 2029 elections. Second, it is needed to rein in bond yields and lower lending rates, as persistent high government borrowing (including by states) keeps the cost of capital elevated, crowding out private investment. Third, it builds essential policy space (“fiscal buffer”) to respond to unforeseen external shocks or geopolitical conflicts without triggering a debt crisis, thereby preserving India’s economic sovereignty and stability.
Q2: According to the analysis, why have past welfare programs failed to reduce inequality in India?
A2: Past welfare programs—such as food distribution, employment guarantees, and health insurance—have been successful in building a social safety net and alleviating absolute poverty. However, they have failed to dent structural inequality because they primarily address the symptoms of deprivation (lack of food, employment, healthcare access) rather than the root causes. The core drivers of India’s extreme inequality are the concentration of wealth (top 1% owns 40.1% of wealth) and inequality of opportunity, stemming from inadequate investment in universal quality education and skill development for the masses. Welfare schemes provide consumption support but do not redistribute capital or fundamentally alter the opportunity ladder, which requires more direct fiscal tools like progressive taxation and massive human capital investment.
Q3: What is the proposed link between cutting government revenue spending and boosting economic growth?
A3: The link is based on the reallocation of resources to higher-multiplier activities. Much government revenue spending (subsidies, administrative costs, certain untargeted transfers) has a low economic multiplier—close to neutral. By “radically cutting revenue spending by downsizing government”—i.e., rationalizing inefficient expenditure—the budget can free up significant resources. These resources should then be redirected towards high-multiplier capital expenditure (capex). Public capex on infrastructure has a multiplier of 2 to 2.5, meaning every rupee spent generates 2-2.5 rupees in economic activity. It creates jobs, builds productive assets, and crucially, “crowds in” private investment by de-risking projects and providing complementary infrastructure. Thus, cutting low-impact consumption spending to fuel high-impact investment spending is a growth-positive form of fiscal consolidation.
Q4: What is the “holy trinity” of fiscal policy, and how can the budget potentially achieve it?
A4: The “holy trinity” refers to simultaneously achieving three objectives: 1) Fiscal Consolidation (reducing deficit/debt), 2) Sustainable High Growth, and 3) Reduced Inequality. Conventional wisdom suggests these goals conflict. However, the analysis argues they can be synergized through a specific policy mix and balance. The achievable path is investment-led consolidation and redistribution: downsizing inefficient revenue spending to consolidate; redirecting those savings plus revenues from more progressive taxation into high-multiplier public capex and human capital investment (education, health) to spur growth; and using the same progressive taxes and universal public goods to directly address wealth concentration and opportunity inequality. The key is the quality and targeting of expenditure, not just its size.
Q5: What specific fiscal risks loom after the 2026-27 Budget, and how should the budget account for them?
A5: Two major, predictable fiscal risks loom on the horizon:
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Pay Commission Liabilities: The budgets of 2027-28 and 2028-29 will need to fund the implementation of Pay Commission awards for government employees, including substantial accumulated arrears. This is a massive, known future liability.
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Political Cycle Pressures: The 2028-29 budget will be the last full budget before the next general elections, historically a period prone to populist spending that undermines fiscal discipline.
The current cash-based accounting system allows the government to ignore these known future costs. The budget should, ideally, begin accrual-based accounting (as hoped from the 16th Finance Commission) to provision for these liabilities. At a minimum, the 2026-27 budget must consolidate aggressively to create the fiscal space to absorb these future shocks without derailing the medium-term debt target of 50% of GDP by 2031.
