Union budget: Why the real impact on India’s economy lies beyond the headlines

Nominal GDP may not be affected much with the shift to the new series. The tentative (old series) advance estimate for the current year issued on 7 January is ₹357.14 trillion. The budgeted nominal GDP for 2026-27 is placed at ₹393 trillion, assuming 10% growth. We have to use these for now.

There are two other changes. The 16th Finance Commission report covering the 2026-31 period was tabled only with the budget for 2026-27, but is factored into the budget figures. The aggregate share of states in Union tax revenues remains at 41%.

The second change in the offing is the 8th Pay Commission report to be released in April 2027, but with retrospective effect from 1 January 2026. Advance fiscal provisioning for retrospective application is never done. Arrears for the current and next budget year will be payable in 2027-28, causing an arrear bump-up in revenue expenditure that year on top of the salary bill discontinuity.

My principal pitch is that what matters is not the policy headlines so much as what underlies the headlines. We are in a new abusive world order, where the powerless are punished. What we do domestically will make or break us.

The absolute fiscal deficit for 2025-26 by the provisional estimate (PE) is ₹15.58 trillion, below the ₹15.69 trillion budgeted. The fiscal deficit for 2026-27 is projected at 4.3% of GDP, but because of the fluid denominator, the absolute figure of ₹16.96 trillion is more reliable. It shows a rise of ₹1.38 trillion. Still, fiscal consolidation is on track.

Fiscal consolidation has been achieved despite an increase in effective capital expenditure, aggregating direct expenditure and capital grants to states, from the pre-pandemic average of 2.7% of GDP (Economic Survey, para 2.29) to 3.9% for 2025-26 (PE) and 4.4% budgeted for 2026-27. Current (revenue) expenditure did much of the adjusting. At 10.8% of GDP for 2025-26 (PE) and 10.5% budgeted for 2026-27, it is below the pre-pandemic average of 11.1%, attributed (Economic Survey, para 2.24) in large part to reduction of subsidy leakages through direct benefit transfers.

An impressive increase in tax revenue also helped. Non-tax revenue further supported the fisc with a dividend payout of ₹2.68 trillion from the Reserve Bank of India (RBI).

Without meaning to rain on the parade, revenue expenditure on maintenance actually needs enhancement when capital assets are being created, without which the assets created could become unproductive, or actually treacherous. Are the required expenditures for maintenance of roads and sewage systems receiving budgetary support? Are leaking sewage pipes being repaired or replaced?

Can the rising share of capital asset creation in total expenditure be termed an improvement in expenditure quality without reference to the mix of assets created? Are sewage treatment plants being constructed so that untreated sewage does not flow into the rivers from which drinking water is sourced? Are there too many vacancies in regulatory bodies for them to function effectively? Will regulatory failure and public health catastrophes, resulting from polluted air and water, support growth?

The major fiscal bolts have already been shot. Income tax and GST rates were dropped in the current fiscal year. Monetary and trade policy have moved in concert. The last RBI bi-monthly monetary policy announcement for the current year is due on 6 February, with very little room for further reduction of the repo rate. Banks are already struggling to attract deposits.

In trade policy, the free trade agreement with the European Union (EU) reached on 27 January is expected to be operationalized by the end of 2026. The agreement details are yet to be hammered out, especially on the difficult issue of the Carbon Border Adjustment Mechanism, for which carbon rating has to be done on a producer-specific basis with EU-accredited auditors.

Nevertheless, there is room for optimism. The budget introduces a number of well-targeted reforms. Three are noteworthy.

First, the expanded scope for the Trade Receivables Discounting System, a platform for discounting unpaid commercial dues to small enterprises, a dire need. Second is the huge range of skill enhancement programmes, including for geriatric care and mental health care, again a dire need. Finally, the budget’s supportive promotion efforts towards commercial tree crops dovetails into the fall in EU tariffs and the demand boost which will come from there.

The new Income Tax Act will become effective from 1 April 2026. Provisions for tax deduction or tax collection at source have been procedurally simplified and their rates reduced. Income tax payments by cooperatives and service providers in information technology have been procedurally facilitated. Indirect tax provisions have also been liberalized with respect to the imported input needs of exporters. There will be cheers in many quarters.

The author is an economist.