The Union Budget 2026–27 sets out an ambitious fiscal roadmap aligned with India’s long-term goal of becoming a developed nation by 2047. With strong emphasis on frontier technologies and public investment, the Budget seeks to balance growth, welfare, and fiscal prudence. Yet, beneath this vision lies a set of structural concerns around implementation capacity, revenue buoyancy, and the slowing pace of fiscal consolidation.
Why Budget 2026–27 matters for Viksit Bharat
A substantial part of the Finance Minister’s speech focused on expenditure programmes aimed at transforming India into a “Viksit Bharat” by 2047. The focus on Artificial Intelligence, biopharma, semiconductors, and critical minerals reflects a clear intent to position India within global value chains of advanced technology. The real test, however, lies not in intent but in execution — and in whether fiscal resources can sustain this transformation over time.
Reshaping expenditure priorities: from consumption to capital
Over the last decade, the Government of India has steadily restructured its spending profile. The share of revenue expenditure in total expenditure has declined from 88% in 2014–15 to about 77% in 2026–27 (BE). Central subsidies alone account for a 7 percentage point fall.
This shift has created space for higher capital expenditure, which has played a stabilising role in post-COVID GDP growth. However, while capital spending remains elevated as a share of GDP, its growth momentum has slowed sharply — from 28.3% in 2023–24 to 4.2% in 2025–26 (RE), with a modest recovery to 11.5% budgeted for 2026–27. In effect, capital expenditure is expected to remain nearly static at around 3.1% of GDP.
Revenue outlook and the problem of tax buoyancy
Revenue projections for 2026–27 are conservative and likely achievable. The concern lies in tax buoyancy, which has slipped to 0.8 — below the benchmark value of 1 that indicates taxes growing in line with GDP.
This divergence is driven by:
- Direct taxes showing buoyancy of 1.1 and accounting for 61.2% of gross tax revenues
- Indirect taxes showing buoyancy of just 0.3 with a 38.8% share
Weak growth in Goods and Services Tax collections is the principal reason. With mounting demands for developmental and welfare spending, strengthening indirect tax buoyancy has become a fiscal necessity rather than a choice.
Finance Commission awards and shrinking transfers to States
The recommendations of the Sixteenth Finance Commission (FC16) retain States’ share in the divisible pool of central taxes at 41%. Consequently, tax devolution remains unchanged at 3.9% of GDP.
However, the discontinuation of revenue deficit grants and the absence of sector- or State-specific grants have reduced overall transfers. Total Finance Commission grants have fallen from 0.43% of GDP in 2025–26 (the final year of FC15) to 0.33% in 2026–27, breaking the usual pattern of a step-up in the first year of a new award period.
Slowing fiscal consolidation: a growing red flag
Post-pandemic fiscal consolidation has steadily lost momentum. The reduction in the fiscal deficit-to-GDP ratio has declined from 0.7 percentage points in 2024–25 to just 0.1 percentage point in 2026–27 (BE).
The shift from targeting the fiscal deficit to focusing on the debt-GDP ratio has also raised transparency concerns. Since both indicators move together depending on nominal GDP growth, a credible framework would clearly spell out:
- A five-year glide path for both debt and deficit ratios
- Assumptions on nominal GDP growth
- Timelines for achieving FRBM targets
Under the Fiscal Responsibility and Budget Management Act, the Centre is committed to a debt-GDP ratio of 40% and a fiscal deficit of 3% of GDP — goals whose timelines now appear increasingly uncertain.
Debt, interest burden, and crowding-out risks
An elevated debt-GDP ratio has direct consequences for fiscal flexibility. The effective interest rate on central government debt is estimated at 7.12% in 2026–27, continuing an upward trend. Interest payments are projected to absorb nearly 40% of revenue receipts, significantly compressing space for productive primary expenditure.
The logic behind a 3% fiscal deficit cap remains strong. If combined Centre and State borrowing absorbs 8–9% of GDP, investible resources for the private sector shrink, undermining the prospects of a private investment-led growth cycle.
What to note for Prelims?
- Revenue expenditure share down to ~77% of total expenditure
- Capital expenditure static at ~3.1% of GDP
- Gross tax buoyancy at 0.8 in 2026–27 (BE)
- States’ share in divisible pool retained at 41%
- Interest payments nearing 40% of revenue receipts
What to note for Mains?
- Trade-offs between capital expenditure and fiscal consolidation
- Implications of weak indirect tax buoyancy for fiscal sustainability
- Changing role of Finance Commission grants in Centre–State relations
- Debt–deficit dynamics and credibility of fiscal targets
- Fiscal stability as a prerequisite for private investment and long-term growth
