Budget to maintain fiscal rectitude in the face of global storm

India’s growth-inflation mix has proved way more favourable than anticipated, as has global growth. Overall, fiscal 2026 has been a year of resilience for India.

The limberness has been underpinned by accommodative monetary and fiscal policies, robust corporate balance sheets and favourable developments such as above-normal monsoon and subdued crude oil prices.

Trade has been cushioned by the front-loading of exports, exemptions for electronics and pharmaceuticals, and a high proportion of service exports, which are less exposed to tariffs.

Looking ahead, we expect real gross domestic product (GDP) growth to moderate (6.7% versus 7.4%) next fiscal, but the nominal one to accelerate (10.5% versus 8% in fiscal 2026) as inflation normalizes. That should support tax collections and corporate revenues.

Trade-related uncertainty has been particularly high. India faces among the highest tariffs levied by the US, absent a trade deal.

Given the uncertain landscape, sagacity demands maintaining solid macroeconomic fundamentals and ample fiscal buffers to duke out potential exigencies.

On its part, the central government has maintained fiscal rectitude over the past decade, barring the emergencies of the pandemic.

It follows, therefore, that the upcoming Union Budget will keep the fiscal deficit target at around 4.4% of GDP for FY27, consistent with this year’s goal.

Pertinently, yields on government bonds have remained sticky despite the fiscal discipline, low inflation and proactive repo-rate cuts by the Reserve Bank of India. The reason is not hard to find—states have borrowed beyond their budgets, underscoring the need for fiscal discipline across tiers of government.

Put another way, this is an opportune time to revive and track the Public Sector Borrowing Requirement (PSBR) as the holistic measure of the nation’s fiscal health.

PSBR encompasses borrowings by the general government (central, state and local) and public sector enterprises owned or controlled by central and state governments, including off-budget borrowings. By considering the entire public sector, PSBR helps assess the space available for private sector borrowing and the pressure on government bond yields.

While India remains predominantly a domestically driven economy, its integration with global trade and financial flows have increased over the years, making global developments more relevant.

Amid prevailing challenges, India has an opportunity to activate domestic growth drivers by debottlenecking the economy and enhancing its potential growth rate.

We have seen faster progress on reforms this fiscal, including the implementation of simplified labour laws, initiatives to streamline tax and regulatory structures to reduce compliance burdens, and most recently, the opening up of the insurance sector to 100% foreign direct investment (FDI).

These reforms are ongoing, and the budget would outline focus areas for fiscal 2027. Although the budget is not the sole platform for such support, it is increasingly being used for major policy announcements.

Capital deepening remains critical for elevating India’s growth rate and sustaining a ‘high growth’ trajectory.

Government and household investments have driven growth after the pandemic, yet the overall investment-to-GDP ratio remains stuck around 30%. Private investments are beginning to pick up, and it is essential that this momentum continues, allowing the private sector to wrest the capex baton from the government.

While reforms and improvements in the ease of doing business foster a conducive environment for the sustained return of private corporate investments—which are currently showing positive signals—targeted government support will still be required in strategic sectors.

The nature of investment is also evolving. Crisil estimates that over fiscals 2026-2030, the Production-Linked Incentive (PLI) scheme and emerging sectors, such as electric vehicles, semiconductors, electronics, photovoltaic cells, and data centres, will account for 25% of industrial capex, up from 12% in fiscals 2021-2025.

Incentives with sunset clauses have been instrumental in promoting investments in some emerging segments like electronics under the PLI scheme.

It may be prudent to prioritise scale initially and subsequently focus on higher value addition in segments such as advanced carbon composite batteries, where the investment-to-incentive ratio is high and stringent domestic value-addition norms could discourage investment.

The government has set an ambitious target of Viksit Bharat—or becoming a developed economy—by 2047.

Each budget till then will be a stepping stone to that overarching goal. A context-lens for the long haul, as it were.

Dharmakirti Joshi is chief economist, Crisil Ltd.