While presenting the Union Budget 2026-27, a considerable part of the Finance Minister’s Budget speech dealt with the expenditure programmes that will be launched to enable India to become developed by 2047. The emphasis on the advanced technology sectors such as Artificial Intelligence, biopharma, semiconductor and critical minerals among others, is well taken. The concern with these expenditure programmes is on how well they are going to be implemented and the pace at which they will enable the goal of Viksit Bharat to be achieved.
Expenditure priorities, revenue prospects
In order to provide fiscal space for these changing priorities, the Government of India has been successfully undertaking a restructuring, particularly of its revenue expenditures. For more than a decade, the share of revenue expenditure to total expenditure has been going down, from 88% in 2014-15 to about 77% in 2026-27 (BE), that is a fall of 11% points. Within this, the fall in central subsidies was 7% points of total expenditure. Correspondingly, the share of capital expenditure in total expenditure has increased.
The Centre’s emphasis on capital expenditure has played an important role in supporting GDP growth. As a percentage of GDP, the Centre’s capital expenditure, in the post-COVID-19 years, has been at a high level. However, its annual growth rate has fallen over time. Thus, from a recent peak growth of 28.3% in 2023-24, it fell to 10.8% in 2024-25 and to 4.2% in 2025-26 (RE). It is budgeted to increase now to 11.5% in 2026-27 (BE), which is only marginally higher than the assumed nominal GDP growth of 10.0%. Thus, it will almost remain static at 3.1% of GDP in 2025-26 (RE) and 2026-27 (BE). It may be noted that the budgeted capital expenditure growth in 2025-26 was 10.1%, but a growth of only 4.2% was achieved as already noted.
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The Government of India’s revenue receipts, particularly projections for 2026-27 (BE) of tax revenues are cautious and are likely to be achieved. But the concern is that the buoyancy of Centre’s gross tax revenues in 2026-27 (BE) has fallen to 0.8, well below the benchmark of 1. This consists of a buoyancy of 1.1 of direct taxes, which has a share of 61.2%, and a buoyancy of 0.3 of indirect taxes, which has a share of 38.8% in Centre’s gross tax revenues. The main reason for the lower overall buoyancy is linked to the Goods and Services Tax (GST) collections, which are not expected to keep pace with GDP growth in 2026-27 (BE). In view of the high pressure on increasing expenditure, both developmental and welfare, the government should take a good look at the indirect taxes structure and raise their buoyancy to 1.
The recommendations of the Sixteenth Finance Commission (FC16) have not provided for any change in the share of States in the divisible pool of central taxes, keeping it at 41%.
The assignment of taxes to the States, therefore, has remained the same at 3.9% of GDP in 2025-26 (RE) and 2026-27 (BE). Also, the FC16 did not recommend any revenue deficit grants or sector/State-specific grants. Because of discontinuation of revenue deficit grants, there would be a reduction in the overall transfers to the States as compared to FC15. In fact, there has also been a reduction in other components of FC grants — the reason why total FC grants to the States have fallen from 0.43% of GDP in 2025-26 (RE) — the last year under the recommendations of FC15 — to 0.33% in 2026-27 (BE), the first year under the recommendations of the FC16. Usually, in the first year of an FC award period, there is a step jump in the volume of grants.
Pace of fiscal consolidation
The slowdown in the pace of fiscal consolidation is also a major concern. The pace of reduction in the fiscal deficit to GDP ratio has progressively fallen in the post-COVID-19 years. Considering the period from 2023-24, the annual reduction in this ratio in successive years was 0.7% points in 2024-25, 0.4% points in 2025-26 (RE) and only 0.1% point in 2026-27 (BE). The change in the targeting strategy from fiscal deficit to targeting the debt-GDP ratio also does not give much confidence. In fact, the debt-GDP ratio and fiscal deficit to GDP ratio are interdependent and move in tandem depending on the nominal GDP growth.
A transparent strategy would be to give the glide path of debt-GDP ratio and fiscal deficit relative to GDP with an underlying assumption of nominal GDP growth for the next five years. It should also indicate as to when the respective targets committed to in the Fiscal Responsibility and Budget Management Act 2018, that is, of 40% for debt-GDP ratio and of 3% for fiscal deficit to GDP ratio are likely to be achieved.
It is also useful to note that maintaining an unduly high debt-GDP ratio leads to a high interest payment to revenue receipts ratio. The effective interest rate for central government debt is estimated at 7.12% in 2026-27 (BE). This rate has been rising progressively for the last three years. In fact, as per the 2026-27 (BE), the interest payment to revenue receipts ratio is close to 40%, thereby squeezing the space for the required primary expenditures.
It must be stressed that the limit of fiscal deficit at 3% of GDP has a strong logic behind it. If the Centre and States take 8%-9% of GDP, the investible resources available for the private sector will come down strongly. In this situation, it is difficult to expect private investment to pick up.
A good framework
Taken together, the Budget presents a good road map to achieve the status of a developed country by 2047. It has highlighted the critical areas where the government and country must focus on. Sustained growth needs monetary and fiscal stability. The path of fiscal consolidation requires a relook.
C. Rangarajan is Chairman, Madras School of Economics, and a former Governor of the Reserve Bank of India. D.K. Srivastava is Member, Advisory Council to the Sixteenth Finance Commission, and a former Director of the Madras School of Economics. The views expressed are personal
Published – February 05, 2026 12:16 am IST
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