As India prepares for the forthcoming Union Budget, expectations from a population of nearly 1.46 billion are inevitably diverse. Yet, fiscal policymaking is as much about restraint as it is about ambition. The real challenge before the Budget lies not in trying to satisfy every aspiration, but in focusing on a narrow set of imperatives that can shape long-term economic outcomes. Three priorities stand out: sustaining fiscal discipline, addressing rising inequality, and doing both without compromising high growth.
Why fiscal sustainability has become the first test
India’s fiscal consolidation over the last five years marks a notable turnaround from the pandemic shock. The gradual reduction in the gross fiscal deficit and government liabilities has restored a degree of macroeconomic credibility. Achieving the budgeted deficit targets for 2025–26 would mean a sharp compression from the 2020–21 peak, alongside a rare primary revenue surplus reminiscent of the pre-global financial crisis period under the framework.
Staying on this consolidation path in 2026–27 by targeting a deficit close to 4.2 per cent of GDP would offer multiple advantages—greater space for counter-cyclical stimulus during downturns, moderation in bond yields, softer lending rates, and improved investor confidence. It could also strengthen India’s case with global rating agencies and preserve fiscal room in case of external or geopolitical shocks.
Hidden fiscal risks beyond the current Budget
While the immediate trajectory looks reassuring, fiscal risks loom beyond 2026–27. The implementation of future Pay Commission awards and the proximity of the next general elections could strain public finances in subsequent years. A deeper structural concern lies in India’s continued reliance on cash-based accounting, which fails to provide for known future liabilities.
A shift towards accrual accounting—an issue expected to be examined by the Sixteenth Finance Commission—could improve transparency and credibility. Failure to sustain consolidation would undermine the medium-term objective of reducing central government debt to pre-pandemic levels and complicate coordination with States, whose debt ratios are already edging upward.
Why inequality now demands fiscal attention
Despite decades of economic growth, income and wealth inequalities have widened both globally and in India. Welfare schemes, food security programmes, employment guarantees, and public health insurance have cushioned vulnerability, but they have not fundamentally altered wealth concentration. Opportunity gaps and uneven human capital formation risk deepening these divides.
Evidence from the World Inequality Report shows the scale of the challenge: the top 1 per cent of Indians hold over 40 per cent of total personal wealth, while the top 10 per cent control nearly two-thirds. These levels are significantly higher than those seen in most OECD economies, raising questions about the inclusiveness of growth.
Fiscal policy as a tool against inequality
Taxation and expenditure choices can directly shape distributional outcomes. Redistribution towards lower-income groups increases the marginal propensity to consume, strengthening the Keynesian multiplier and supporting demand. However, the challenge lies in designing tax and spending policies that reduce inequality without discouraging investment or slowing growth. This calls for better data, including panel datasets, to assess the heterogeneous impacts of fiscal policy across income groups.
Reconciling growth, equity, and discipline
The apparent “impossible trinity” of high growth, fiscal consolidation, and inequality reduction is not insurmountable. Budget outcomes are non-linear and depend on policy mix rather than individual measures. A decisive shift in expenditure composition—away from routine revenue spending towards productive capital expenditure—can help achieve multiple goals simultaneously.
Scaling up public capex, crowding in private investment through risk-sharing and project derisking, and revisiting incentives such as accelerated depreciation can stimulate investment. With capital expenditure multipliers significantly higher than those of revenue spending or tax cuts, such a strategy offers a pathway to growth that is both fiscally prudent and socially inclusive.
What to note for Prelims?
- Gross Fiscal Deficit (GFD) and primary revenue balance
- FRBM Act and fiscal consolidation targets
- Role of Finance Commissions in fiscal reforms
- Wealth inequality indicators from global reports
What to note for Mains?
- Trade-offs between fiscal discipline and welfare spending
- Fiscal policy as an instrument to address inequality
- Importance of expenditure quality over expenditure size
- Debt sustainability and Centre–State fiscal coordination