India’s budget doubles down on a tried and tested formula—with debt reduction as a distant target

That spirit prevails in India’s budget for 2026-27 too. It marks a shift in fiscal policy from annual deficit calibration to medium-term debt reduction. Finance minister Nirmala Sitharaman’s last budget offered a tax stimulus, kept up infra spending and managed to squeeze the Centre’s deficit to 4.4% of GDP even as nominal growth softened.

Ever since covid, capex has played a heroic role in the economy’s expansion. The latest budget dares not depart from that formula. Its ₹12.2 trillion capex plan is almost 23% of its ₹53.5 trillion expenditure pie, a notable increase.

Other stand-out allocations include those for our chip-making mission, a bio-pharma thrust and a carbon-capture initiative. Next year’s deficit is pegged at 4.3%. Achievable even if an inflation uptick fails to lift revenues as expected, this would count as progress towards reducing central debt to half the size of our economy by 2030-31.

Yet, two questions arise. First, could a five-year debt path lull us into fiscal complacency over the effects of, say, a sharp revival at some point in private demand and investment? And second, is it not time to extend the budget’s horizon and pivot heavily towards health and education?

As for buffers against trade flux, the budget’s proposals are in the right direction—with customs relief in focus. Import-duty exemptions span inputs for sectors on a priority list. Import barriers for making aircraft, setting up nuclear power plants and processing critical minerals will be axed, with a few other items relieved too.

The highlight of this exercise, however, is process reform: a “minimal intervention" customs regime that uses technology to speed up cargo clearances and thus helps Indian factories join global value chains with low slack tolerance.

This quest to ease port-level friction, though, has not been matched by a discernibly urgent effort to reverse India’s capital inflow squeeze of 2025-26. Moves to boost our market for corporate debt, lure individuals to invest more in Indian equity and liberalize forex rules, apart from a few sector-specific tax incentives for foreign investors, all seem unequal to the task.

But then again, inflows come down to the returns that investments in our economy offer. So long as India’s growth story is intact and geopolitics doesn’t worsen to our disadvantage, we can hope for a revival on this score.

On the macro front, perhaps it is time to align our 2003 fiscal law with practice, instead of budgets carrying tack-ons year after year to explain deviations. From now on, unless nominal growth slumps, the Centre’s shift to a debt target will let it relax its fiscal pullback.

Yet, if a distant debt ratio is taken as the sole budget constraint, a sudden boom in overall demand could disturb India’s macro-level stability: if the fisc is not reined in quickly, we could expect upward pressure on inflation and the cost of capital, with both risking a doom-loop should costly credit get in the way of a private-sector supply response.

In other words, we must not let today’s big-spender formula get hard-set. Even if demand stays on a slow-track, it would be prudent to invest a bigger share of public funds in the upward mobility of Indian multitudes. Else, domestic impulses may weaken and leave GDP growth over-reliant on dicey exports. A rejig of our fiscal priorities would help fend off that risk.