The revenue shortfalls are offset by expenditure compression, keeping the headline deficit on target.

Fin­ance Min­is­ter Nirmala Sithara­man presen­ted the Budget for 2026-27 at a moment of heightened global uncer­tainty. Trade ten­sions, shift­ing mon­et­ary policy in advanced eco­nom­ies and per­sist­ent sup­ply-chain fra­gil­it­ies all loom large.

Mar­kets showed a short-term “ran­dom-walk” reac­tion to higher STT on deriv­at­ives. Yet the Budget responds with fiscal con­sol­id­a­tion drive and for­ward-look­ing invest­ment that should strengthen India’s growth tra­ject­ory while pre­serving mac­roe­co­nomic sta­bil­ity.

DEBT AND DEFICITS

With the fiscal defi­cit tar­geted at 4.3 per cent of GDP for 2026-27 — down from the 4.4 per cent revised estim­ate for 2025-26 — the gov­ern­ment has reaffirmed its com­mit­ment to gradual con­sol­id­a­tion, align­ing with a medium-term path toward below 4 per cent. This steady adjust­ment is com­mend­able.

The primary defi­cit is 0.7 per cent of GDP for FY27, rev­enue defi­cit remained con­stant at 1.5 per cent. Phas­ing out of rev­enue defi­cit is ‘golden prin­ciple’ of fiscal rules, however it is not advis­able in times of mac­roe­co­nomic uncer­tain­ties and geo­pol­it­ical risks.

The debt-to-GDP ratio is estim­ated to be 55.6 per cent of GDP in BE 2026-27, com­pared to 56.1 per cent of GDP in RE 2025-26, with a medium-term anchor of 50 per cent (±1 per cent) by 2030-31. A crit­ical reform addresses off-budget bor­row­ings (OBBs), long cri­ti­cised by 16th Fin­ance Com­mis­sion for opa­city.

To fin­ance the fiscal defi­cit, the net mar­ket bor­row­ings from dated secur­it­ies are estim­ated at ₹11.7 lakh crore. The bal­ance of debt fin­an­cing is expec­ted to come from small sav­ings and other sources. The gross mar­ket bor­row­ings are estim­ated at ₹17.2 lakh crore. Gen­eral gov­ern­ment debt dynam­ics bene­fit from these meas­ures, along­side con­tained gross mar­ket bor­row­ings and efforts to lengthen debt matur­it­ies.

FISCAL MARKSMANSHIP

Fiscal marks­man­ship under­scores prag­matic man­age­ment. In 2025-26, rev­enue short­falls — partly due to mod­er­ated buoy­ancy — were offset by expendit­ure com­pres­sion, keep­ing the head­line defi­cit on tar­get des­pite fore­cast­ing vari­ances. Effect­ive cap­ital expendit­ure was adjus­ted down­ward, yet the over­all con­sol­id­a­tion path remained intact.

This respons­ive recal­ib­ra­tion pre­serves cred­ib­il­ity, demon­strat­ing that rev­enue sta­bil­ity anchors expendit­ure plan­ning while allow­ing flex­ib­il­ity amid uncer­tain­ties. Closer ana­lysis of fore­cast­ing errors — whether sys­temic or ran­dom — could fur­ther refine future budgets.

CAPEX, PVT INVESTMENT

Cap­ital expendit­ure remains a key growth driver, with Cent­ral out­lay at ₹12.2 lakh crore and effect­ive capex (includ­ing state sup­port) reach­ing ₹17.15 lakh crore. This multi-year pipeline provides pre­dict­ab­il­ity, car­ry­ing high mul­ti­pli­ers in an eco­nomy where private cor­por­ate sec­tor is well posi­tioned to respond.

Years of delever­aging have strengthened bal­ance sheets, with debt-to-equity ratios at multi-dec­ade lows and interest cov­er­age ratios improved.

Bank­ing sec­tor non-per­form­ing loans have sta­bil­ised, free­ing credit chan­nels. A mean­ing­ful pick up in private capex cycles in 2026-27 can be expec­ted, if there is an eas­ing to the “demand uncer­tain­ties” amidst mac­roe­co­nomic and geo­pol­it­ical risks.

AI, CLIMATE REFORMS

Arti­fi­cial intel­li­gence receives ₹10,000 crore for the National AI Mis­sion (com­pute infra­struc­ture, skilling 10 mil­lion youth) and a ₹5,000 crore Innov­a­tion Fund for quantum, semi­con­duct­ors, and bio­tech­no­logy, with enhanced R&D deduc­tions. The Budget has announced a 20-year tax hol­i­day to for­eign firms using local data centres built in India.

Energy trans­ition announce­ments include the National Crit­ical Min­er­als Mis­sion, expan­ded with ded­ic­ated Rare Earth Cor­ridors in Odisha, Ker­ala, Andhra Pra­desh, and Tamil Nadu, integ­rat­ing min­ing, pro­cessing, and mag­net man­u­fac­tur­ing to address pro­jec­ted quad­rupling of global rare earth demand by 2040.

16TH FINANCE PANEL

The Budget aligns closely with the 16th Fin­ance Com­mis­sion’s recom­mend­a­tions for fiscal con­sol­id­a­tion while main­tain­ing a status quo tax trans­fers at 41 per cent of divis­ible pool to the States, pri­or­it­ising mac­roe­co­nomic sta­bil­ity.

The fiscal fore­cast­ing errors in rev­enue and expendit­ure need to be fol­lowed up to under­stand the sources of errors — if sys­temic bias or ran­dom­ness affected the fiscal arith­metic.

There is a shadow of 16th Fin­ance Com­mis­sion on this Budget. With the new tax trans­fer for­mula — Pop­u­la­tion 2011 (17.5 per cent) and income dis­tance (42.5 per cent) take the lion share in weight­age with 60 per cent total. The rest 40 per cent weight­age is equally divided for four vari­ables — demo­graphic trans­ition, forest, area and con­tri­bu­tion of a State to GDP.

THE FINEPRINT

The devil lies in the details. It is inter­est­ing to note that 16th Com­mis­sion’s hori­zontal for­mula intro­duces a not­able tilt towards efficiency, reportedly incor­por­at­ing a new 10 per cent weight for States’ con­tri­bu­tion to national GDP along­side other cri­teria of income dis­tance, area, cli­mate and demo­graphic per­form­ance.

This marks a depar­ture from heav­ier equity focus in prior Com­mis­sions towards stra­tegic growth.

The Budget has taken the third tier (cit­ies) also as core part­ners in this jour­ney towards Viksit Bharat, with announce­ments relate to “cit­ies as the unit of ana­lysis” and ini­ti­at­ing alloc­a­tions to float muni­cipal bonds.

The fiscal space of sub­n­a­tional gov­ern­ments is there­fore a major factor in pur­su­ing the Viksit Bharat dream to become a developed coun­try by 2047.

(This article was first published in The Hindu Business line on February 2, 2026. https://www.pressreader.com/india/businessline-hyderabad-9wvx/20260203/281814290293626)