Budget: It combines strategic ambition with fiscal discipline to set India up for a sustainable growth trajectory

What marks the budget out is its fiscal discipline and strategic ambition. It reveals a government betting on India’s long-term trajectory. After years of successful fiscal consolidation, India is channelling resources towards an essential capacity build-up: infrastructure that works, human capital that competes globally and institutions that enable growth.

Following the 2025-26 pattern, operational spending—administrative costs, central government programmes and overheads—will grow slower than the economy. Revenue spending will continue to fall while interest payments are expected to be contained—both as a proportion of GDP. Revenue expenditure includes grants for capital spending by states. Accounting for these, the effective capital-to-current spending ratio is expected to approach 50% in 2026-27 from less than 40% in 2025-26.

Revenue compression stems from tax measures, with income tax and GST reductions putting money back into citizens’ pockets and stimulating consumption. This has pushed tax buoyancy below one, with a sustained decline expected ahead. Non-tax revenues in 2025-26 beat expectations primarily through telecom licence fees and spectrum charges, which more than doubled. The budget expects these to moderate in 2026-27.

Both revenues and expenditures are budgeted to contract sharply relative to GDP—the former by 0.25 percentage points and the latter by 0.30, yielding a 0.05 percentage point fiscal deficit reduction.

What makes these fiscal choices credible is a conservative nominal GDP growth assumption. Building in modest expectations for inflation and the GDP deflator, the budget positions itself to surprise on the upside rather than disappoint. Historical data on tax buoyancy and deflators suggest this caution is well-founded. Prudent budgeting builds credibility with markets and rating agencies.

The Centre’s debt anchor, as outlined in the medium-term fiscal plan, could, however, be tough to achieve if nominal growth surprises on the downside (see graph). Moreover, with states’ overall debt at 28% of GDP, sovereign borrowing remains high, and that’s what markets and credit rating agencies ultimately care about.

Several green shoots deserve attention. Fertilizer and food subsidies have fallen while infrastructure investment continues. These have helped the government’s fiscal strategy, which it has anchored by laying out its debt trajectory, enhancing credibility. With nominal GDP growth projected at 10%, even a modest 0.05 percentage point reduction in the fiscal deficit represents meaningful progress.

Most encouragingly, the budget has moved away from pre-poll spending bonanzas. This restraint reflects a maturing political economy where long-term stability trumps short-term electoral considerations.

The embedded reform agenda addresses fundamental structural challenges. On employment, the government aims to more than double India’s global services share to 10% by 2047. Tourism is positioned as a growth and employment driver, alongside export promotion for labour-intensive manufacturing, including textiles and leather goods. Duty-free imports for specified inputs should enhance competitiveness while new textile parks provide dedicated infrastructure expansion.

A bold play for foreign direct investment offers a tax holiday up to 2047 for cloud service providers, signalling India’s determination to become a digital infra hub and capture a larger share of tech supply chains. Alongside these digital ambitions, urbanization receives attention, recognizing that India’s growth story will increasingly be written in its cities. Complementary investments in research, education and skilling will build human capital necessary for high growth in an increasingly knowledge-intensive global economy.

Markets initially responded negatively. Bond vigilantes reacted to the gross borrowing figure of ₹17.2 trillion, which appears elevated. However, net borrowing tells a more balanced story and the gross figure may be overestimated. Small savings have historically funded a chunk of the government’s borrowing, reducing actual bond issuance. The negative market reaction could reflect unrealistic expectations as well as higher taxes on financial transactions such as on derivatives.

This highlights a critical distinction between short-term market movements and long-term reform. Markets often prize certainty and immediate visibility over structural changes that take time to bear fruit. The budget’s emphasis on “ecosystem reforms," aimed at creating conditions for private sector dynamism rather than state-led growth, represents exactly the unglamorous but essential work markets may initially under-appreciate but reward handsomely over time.

Two issues warrant attention. Interest payments have risen sharply as a proportion of revenues, reflecting the accumulated debt burden and a high interest-rate environment. This constrains fiscal flexibility and makes consolidation pertinent. Also, divestment targets have risen sharply, possibly reflecting projects at advanced stages but raising questions about expectations, given past challenges in achieving targets. Execution will be key.

The budget’s significance extends beyond its immediate fiscal arithmetic. It reflects the government’s priorities and reveals its theory of economic development. What’s striking is how it refrains from using external conditions as an excuse. Instead, it keeps its head down and focuses on process and institutional reforms to sustain growth.

India’s economic challenges are primarily domestic: improving the ease of doing business, building infrastructure, enhancing human capital and creating an environment where entrepreneurs can thrive. By focusing on these fundamentals rather than crafting a narrative about India’s global moment, the budget demonstrates a seriousness of purpose that should over time win both market confidence and attain developmental success. The path forward requires patience; the budget charts a credible course for sustained, inclusive growth.

These are the authors’ personal views.

The authors are, respectively, professor of economics at Ashoka University and head of Ashoka Isaac Center for Public Policy; and a research associate at Observer Research Foundation.