Navigating the Tightrope, Fiscal Consolidation, Growth Imperatives, and the 2047 Vision in Budget 2026-27

Navigating the Tightrope, Fiscal Consolidation, Growth Imperatives, and the 2047 Vision in Budget 2026-27

The Union Budget for 2026-27, presented against the ambitious backdrop of a “Viksit Bharat” (Developed India) by 2047, encapsulates a central dilemma of modern economic management: how to balance the imperative of fiscal discipline with the necessity of high public investment to catalyze long-term growth. The budget speech rightly emphasized futuristic expenditure in advanced technology sectors—Artificial Intelligence, biopharma, semiconductors, and critical minerals. However, as the analysis suggests, the celebration of these priorities is tempered by critical concerns over implementation, the pace of fiscal consolidation, and the structural challenges in revenue mobilization. This budget, therefore, is not just an annual financial statement; it is a vital current affair that reveals the contours of India’s economic strategy at a pivotal moment, highlighting both its aspirations and the significant constraints it must navigate.

The Restructuring of Expenditure: A Qualified Success

One of the most significant structural shifts in India’s fiscal policy over the past decade has been the conscious restructuring of government expenditure. The data is telling: the share of revenue expenditure (largely salaries, subsidies, and interest payments) in total expenditure has fallen from 88% in 2014-15 to about 77% in the 2026-27 Budget Estimates (BE). This 11-percentage-point decline is substantial. Within this, the reduction in the share of central subsidies by 7 percentage points of total expenditure is a critical achievement, reflecting a move towards more targeted delivery (like Direct Benefit Transfers) and a gradual withdrawal from blanket price supports.

Correspondingly, the share of capital expenditure—investments in physical and digital infrastructure—has risen. This reorientation from consumption to creation is fundamental to building long-term productive capacity. The Centre’s emphasis on capital expenditure, particularly in the post-COVID-19 years, has been a primary driver of GDP growth, crowding in private investment by building foundational infrastructure. This shift aligns with the goal of achieving developed nation status; no country has built a sophisticated, high-income economy on the back of consumption-led spending alone.

However, a concerning trend has emerged. The growth rate of capital expenditure has decelerated sharply. From a peak of 28.3% in 2023-24, it fell to 10.8% in 2024-25, and further to a mere 4.2% in the Revised Estimates (RE) for 2025-26. For 2026-27, it is budgeted to grow at 11.5%, only marginally above the assumed nominal GDP growth of 10.0%. Consequently, capital expenditure as a percentage of GDP is expected to remain static at 3.1% in 2025-26 (RE) and 2026-27 (BE). This stagnation, following a period of aggressive expansion, raises questions about the ability to sustain the public investment push required for the 2047 vision, especially if private investment remains hesitant.

The Revenue Conundrum: Cautious Projections and the GST Puzzle

On the revenue side, the budget presents a picture of caution. The tax revenue projections for 2026-27 are deemed achievable, but a deeper dive reveals a soft underbelly: falling tax buoyancy. Tax buoyancy measures the responsiveness of tax revenue to GDP growth. A buoyancy of 1 implies revenue grows in line with GDP. For 2026-27, the overall buoyancy of the Centre’s gross tax revenues is projected at a low 0.8.

This aggregate masks a divergent story within:

• Direct Taxes (Buoyancy: 1.1): Continuing a healthy trend, reflecting better compliance, formalization, and the progressive nature of income and corporate taxes.

• Indirect Taxes (Buoyancy: 0.3): This is the major area of concern, primarily driven by Goods and Services Tax (GST) collections not keeping pace with GDP growth.

A buoyancy of 0.3 for indirect taxes is alarmingly low. It suggests that the GST system, despite its aim of creating a broad, efficient tax base, is not yielding revenue growth commensurate with economic expansion. This could be due to a combination of factors: continued rate rationalization (often downwards), compliance issues, or structural features of the tax that limit its elasticity. The article rightly urges the government to “take a good look at the indirect taxes structure” to raise its buoyancy to 1. Without this, the fiscal space for visionary expenditure programs will remain perpetually squeezed, forcing difficult trade-offs or jeopardizing deficit targets.

The Federal Dimension: The Impact of the 16th Finance Commission

The budget operates under the new award period of the 16th Finance Commission (FC16), whose recommendations introduce a significant shift in fiscal federal relations. The Commission has held the states’ share in the divisible pool of central taxes steady at 41%. More consequentially, it has discontinued the Revenue Deficit Grants (RDG) and reduced other grant components. The RDG was a vital transfer to states that, even after tax devolution, were unable to cover their recurring administrative expenses.

The discontinuation of RDG is a bold move aimed at forcing states to address their own structural revenue deficits, discouraging open-ended welfare schemes, and promoting fiscal responsibility at the sub-national level. However, its immediate impact is a reduction in overall central transfers to states. Total Finance Commission grants have fallen from 0.43% of GDP in 2025-26 (the last year of FC15) to 0.33% in 2026-27. This tightening at the state level could potentially dampen aggregate public spending in the economy unless states successfully ramp up their own revenue efforts—a challenging prospect in the short term.

The Slowing Pace of Fiscal Consolidation: A Major Concern

Perhaps the most critical issue highlighted is the decelerating pace of fiscal consolidation. The fiscal deficit—the gap between the government’s total expenditure and total revenue—is the most watched indicator of fiscal health. The government’s path to reduce this deficit has lost momentum.

Post-COVID-19, the annual reduction in the fiscal deficit-to-GDP ratio has progressively slowed: from 0.7 percentage points in 2024-25, to 0.4 points in 2025-26 (RE), to a minuscule 0.1 point in 2026-27 (BE). At this pace, achieving the legislated target of 3% of GDP (as per the Fiscal Responsibility and Budget Management Act, 2018) seems a distant prospect.

The budget has shifted its communication strategy, emphasizing a target for the debt-to-GDP ratio rather than just the fiscal deficit. While theoretically sound (as debt is a stock variable and deficit a flow), this shift lacks transparency without a clear, multi-year glide path. As the article notes, “A transparent strategy would be to give the glide path of debt-GDP ratio and fiscal deficit relative to GDP with an underlying assumption of nominal GDP growth for the next five years.” The absence of such a roadmap undermines confidence in the commitment to medium-term fiscal discipline.

The high and rising debt burden has real, crowding-out consequences. The effective interest rate on central government debt is estimated at 7.12% for 2026-27 (BE), and the interest payment-to-revenue receipts ratio is alarmingly close to 40%. This means that for every rupee the government earns, 40 paise go merely towards servicing past debt, not building new roads, schools, or labs. This vicious cycle severely constrains “primary expenditures”—the spending on everything other than interest.

Furthermore, a high consolidated fiscal deficit (Centre and States combined at 8-9% of GDP) absorbs a large share of the nation’s savings, leaving fewer investible resources for the private sector. In such a scenario, expecting a vibrant, sustained pickup in private capital formation—essential for the 2047 vision—becomes challenging.

The Imperative of a Reboot: The Path Forward

The Budget 2026-27, therefore, presents a paradox. It articulates a visionary “good road map” for 2047 but operates within a fiscal framework that shows signs of strain. The path of fiscal consolidation, as the article concludes, “requires a reboot.” This reboot must be multi-pronged:

1. Reviving Revenue Buoyancy, Especially from GST: A comprehensive review of the GST structure and its implementation is urgent. Measures to broaden the base, improve compliance through data analytics, and cautiously review rate slabs where necessary are required to ensure indirect tax revenues grow at least in line with the economy.

2. Preserving the Quality of Expenditure: The hard-won shift from revenue to capital spending must be protected. Even if the growth rate of capital expenditure has slowed, its share must not be allowed to decline. Efficiency in implementation—ensuring timely completion and high economic returns on projects—is as important as the allocation itself.

3. A Credible, Medium-Term Fiscal Framework: The government must publish and commit to a detailed five-year glide path for debt and deficit reduction, tied to realistic nominal GDP growth assumptions. This would anchor expectations, guide market borrowing, and reinforce credibility.

4. Catalyzing Private Investment: Beyond public spending, the fiscal environment must be conducive to private investment. A credible consolidation path, coupled with stable and predictable tax policies, is key to unlocking the private sector animal spirits needed to complement public efforts.

In conclusion, the Budget 2026-27 stands at a crossroads. It correctly identifies the sectors that will define the future. However, financing this future without compromising macroeconomic stability is the central challenge. The vision of a Viksit Bharat by 2047 is inspiring, but it will remain a distant dream unless it is built on the solid foundation of fiscal sustainability. The current budget’s暴露出的矛盾—between soaring ambitions and slowing consolidation—is the defining economic affair of the moment. Navigating this tightrope will require not just skillful budgeting, but a fundamental reboot in fiscal strategy, prioritizing revenue enhancement and expenditure efficiency with the same vigor that defines its vision statements.

Q&A: Decoding the Fiscal Challenges in Budget 2026-27

Q1: The article notes a significant fall in the share of revenue expenditure and subsidies. Why is this considered a positive structural shift, and what are the potential social risks?

A1: This shift is positive because it represents a move from consumption-oriented spending to investment-oriented spending. Lower revenue expenditure (on salaries, pensions, and subsidies) frees up resources for capital expenditure (infrastructure, technology, assets), which builds the economy’s long-term productive capacity and growth potential. Reducing blanket subsidies, in particular, improves fiscal efficiency by minimizing leakages and allowing for more targeted support to the genuinely needy through Direct Benefit Transfers (DBT).

Potential Social Risks:

• Welfare Gaps: If the reduction in subsidy shares is not perfectly offset by more efficient targeted transfers, some vulnerable populations may fall through the safety net.

• Political Resistance: Subsidy cuts, even inefficient ones, are politically sensitive. Sudden or poorly communicated reductions can lead to social unrest, as seen historically with attempts to reform fertilizer or fuel subsidies.

• Impact on States: The 16th FC’s discontinuation of Revenue Deficit Grants pressures states to be fiscally responsible. If states mimic the Centre’s cuts in social sector revenue spending to balance their books, it could negatively impact health and education outcomes at the grassroots level.

Q2: What does the sharply declining growth rate of capital expenditure (from 28.3% to 4.2%) imply for India’s growth strategy and the ‘Viksit Bharat 2047’ goal?

A2: The deceleration implies a potential softening of the government’s primary growth lever in the post-COVID era. High public capital expenditure was crucial to revive demand, build infrastructure, and crowd-in private investment. Its stagnation as a percentage of GDP suggests:

• Growth Headwinds: It may be harder to sustain high GDP growth rates if public investment plateaus, especially if private investment does not accelerate sufficiently to take up the slack.

• Infrastructure Bottlenecks: The 2047 vision requires world-class infrastructure in logistics, energy, digital connectivity, and research. A slower pace of public capital spending could delay the creation of this foundational platform.

• Crowding-In Challenge: One of the key aims of public capex is to make private investment more profitable by reducing logistics costs and improving efficiencies. Stagnant public investment might delay the awaited broad-based recovery in private capital formation.

Q3: The tax buoyancy for indirect taxes (GST) is projected at a very low 0.3. What are the likely reasons for this, and why is it a serious concern?

A3:
Likely Reasons:

1. Rate Rationalization: The GST Council has often reduced rates on many items for political or compliance reasons, which can suppress revenue growth even as the volume of transactions increases.

2. Compliance Gaps: Despite improvements, tax evasion and fraudulent input tax credit claims continue to erode the tax base.

3. Structural Design: The multi-rate structure, exemptions, and the complexity of the system can limit its inherent revenue elasticity. Consumption patterns may be shifting towards lower-taxed or exempted items (like unbranded foods).

4. Slow Formalization: While GST promotes formalization, the pace might be slower than expected, leaving a significant part of the consumption economy outside the efficient tax net.

Why it’s a Serious Concern:
A buoyancy below 1 means indirect tax revenues grow slower than the economy. This structurally weakens the government’s ability to fund its expenditures without borrowing. It creates a permanent revenue shortfall relative to GDP growth, forcing harder choices between cutting essential spending, missing deficit targets, or increasing debt. For a developing country with massive spending needs, a non-elastic indirect tax system is a major fiscal handicap.

Q4: How does the 16th Finance Commission’s award, specifically the end of Revenue Deficit Grants, change the fiscal dynamics between the Centre and States?

A4: It fundamentally alters the dynamics by promoting “hard budget constraints” for states.

• End of Bailouts: States can no longer rely on automatic central grants to cover their routine, recurring spending shortfalls. This forces them to either increase their own tax and non-tax revenues or rationalize their revenue expenditures.

• Promotes Fiscal Responsibility: The aim is to incentivize states to undertake politically difficult reforms—like revising power tariffs, user charges for water, or rationalizing state-level subsidies—to achieve revenue balance.

• Potential for Divergence: Fiscally prudent, economically advanced states will adapt more easily. Poorer, slower-growing states with weaker administrative capacity may struggle, potentially leading to a wider inter-state disparity in public service quality unless they receive significant capacity-building support.

• Centers Fiscal Pressure: It shifts the political onus of maintaining day-to-day fiscal balance onto state governments, while the Centre focuses on its own deficit and large national projects.

Q5: The article argues that a high fiscal deficit “crowds out” private investment. Explain this mechanism in the context of the current Indian economy.

A5: Crowding out occurs through the competition for finite financial resources.

1. Absorbs Domestic Savings: To finance its deficit, the government borrows heavily from the domestic financial market (via bonds). This large borrowing absorbs a significant portion of the total savings generated in the economy (household and corporate savings).

2. Increases Cost of Capital: As the government’s demand for loanable funds rises, it competes with private companies seeking loans for investment. This competition pushes up interest rates across the economy.

3. Reduces Availability of Credit: Higher interest rates make borrowing more expensive for businesses. Some projects that were viable at lower rates become unviable. Banks also find it safer and simpler to lend to the government (by buying bonds) than to undertake the risk assessment for private sector loans.

4. Current Context: With the combined Centre+State deficit around 8-9% of GDP, the government is pre-empting a large share of India’s savings. This makes it “difficult to expect private investment to pick up” robustly, as firms face higher costs and potentially scarcer credit, delaying the crucial private investment-led growth phase needed for the 2047 vision.