Budget 2026: India has entered the new year in a mood of surface calm. Markets have staged a recovery. Official growth forecasts remain upbeat. The country is now the world’s fourth-largest economy. January usually invites optimism. It is also the right moment for a harder look, before pressures harden and policy choices narrow.
The economy is no longer dealing with episodic shocks. Several constraints are structural. The most visible is public finance. Combined debt of the Centre and states is above 80% of GDP, by International Monetary Fund estimates. This would be manageable if revenues were strong and growth drivers broad-based. Neither condition holds.
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Interest payments, salaries, pensions, subsidies and welfare absorb most government revenues. Capital expenditure has carried growth through a weak private investment cycle. Any attempt to compress capex to meet debt targets will slow GDP when momentum is already fragile. The stated commitment to medium-term debt reduction sits uneasily with these arithmetic constraints.
Budget 2025 will need clear priorities
The forthcoming Budget will face a blunt trade-off between consolidation and growth support.
A second pressure point is revenue. Goods and services tax collections have lost momentum after three years of post-pandemic recovery. The slowdown is most visible in large consumption-led states, several of which are showing stagnation or contraction. Revenues are increasingly concentrated in a narrow set of manufacturing and logistics hubs. The signal is not ambiguous. Broad-based demand is weakening.
Optimistic assumptions will not compensate for this shift. The Budget needs restraint in revenue projections and closer scrutiny of spending quality, rather than emphasis on headline expansion.
Dwindling household savings
India’s growth model has long relied on domestic savings to fund investment and public borrowing. That buffer is thinning. Household financial savings have fallen sharply as a share of GDP, reflecting weak job creation, stagnant real wages and rising living costs. Lower savings reduce the pool of low-cost bank deposits.
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A Budget that leans heavily on small-savings schemes with elevated administered rates may be politically convenient. It will also weaken monetary transmission and distort financial pricing.
External headwinds persist
The global environment has turned less forgiving. Geopolitics now directly shapes trade, energy and capital flows. The return of Donald Trump to the White House has sharpened the use of tariffs, sanctions and coercive trade tools. Strategic partnerships have offered little insulation.
India remains heavily exposed to the US market for key exports and dependent on discounted Russian energy imports. Both links carry policy risks beyond India’s control. Unlike China, India lacks the scale or fiscal firepower to absorb prolonged trade shocks.
The Budget cannot neutralise geopolitics. It can, however, assume hostile external conditions and respond accordingly—by accelerating export diversification, reducing import dependence in critical sectors and rebuilding fiscal buffers.
Other drags on growth
Private investment remains hesitant. Corporate balance sheets have improved, but capacity expansion has not followed. Uncertain demand and regulatory unpredictability at the state level continue to restrain risk-taking.
State finances add another layer of risk. Growth over the last three years has relied heavily on state-level capital spending, aided by central transfers and interest-free loans. Execution is now diverging sharply. Several large states are slowing capex as own-tax revenues weaken and election-linked spending rises. Off-budget liabilities and guarantees, flagged repeatedly by the Comptroller and Auditor General of India, further cloud fiscal arithmetic. Aggregate numbers mask these stresses. Even a disciplined Union Budget will struggle to sustain growth if state-level fiscal capacity erodes unevenly.
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Human capital is another constraint. Job creation is not keeping pace with the growth of the working-age population. The demographic advantage is narrowing. Skill formation and labour-intensive growth have lagged policy intent.
As growth slows and employment disappoints, demands for subsidies, loan waivers and public hiring will intensify. The Eighth Pay Commission will add to fixed expenditure commitments. Competitive politics makes rationalisation difficult even when fiscal logic is clear.
Budget 2026 as an opportunity
The Budget cannot resolve these pressures at once. It can set a credible tone. Transparent assumptions on growth and revenues, and a believable glide path for debt reduction, will matter more than ambitious targets.
Spending quality also matters. Redirecting expenditure towards logistics, urban infrastructure, power distribution and education will yield higher returns than untargeted subsidies.
Calm should not be mistaken for confirmation that all is well. Fiscal stress, weakening demand, geopolitical uncertainty and political compulsions leave little margin for error. The new year offers an opportunity for course correction. The Budget will indicate whether policymakers choose realism or continue to rely on favourable timing.