ExplainSpeaking | Budget 2026: Three macro worries for the Finance Minister

*Three, the money that the government is forced to borrow to meet the gap between its stated expenses and its expected revenues. This is technically called the fiscal deficit.

On the face of it, the Budget for the new financial year should be a completely new exercise. One could imagine the FM pulling out a clean sheet of paper and deciding to make a totally new Budget for the new financial year. But in reality, that is rarely the case. More often than not, a new Budget has limited space — both monetary and policy — to fundamentally alter things.

Why?

There are several reasons. For one, while all past Budgets were annual financial statements, in each one of them, the government has a lot of committed expenditures. For instance, salaries of its employees cannot be changed from one year to another, nor can the tax rates be tweaked every year.

Moreover, often what the FM can and cannot do or what she should or should not do is decidedly affected by the state of the government finances in the year that is ending — that is, the current financial year, which started in April last year and will end in March 2026.

For instance, if in the current financial year a section of the Indian economy is badly hurt — for instance, Indian exports have been hit due to massive US tariffs this year — then it may set the stage for the FM to address that issue in the next Budget. So, often enough, looking back at the year gone by can provide good clues as to the main concerns that the FM may attempt to address in the next year’s Budget.

What does the data from the current year tell us?

There are many issues one can point to, but at the macroeconomic level, there are three main concerns:

1. Weak GDP growth

This may sound odd since all stories about India’s economic growth (measured by Gross Domestic Product or GDP) have been resoundingly upbeat. However, most reports that present India as the fastest-growing major economy are talking about “real” GDP growth. When it comes to the making of the Union Budget, what matters more is “nominal” GDP and its growth rate.

To be sure, what we count first is the nominal GDP — that is, the total value of all goods and services in today’s prices. To arrive at “real” GDP, we take away the effect of prices so that we get to know how we “really” grew, like how many more apples, trucks and shirts, etc., we produced this year as against the last.

There is a reason why nominal GDP matters more: Because it is the observed value and forms the starting point for all Budget calculations. For instance, if a government wants to know how much it will earn in tax revenues in the next financial year, it has to know the size of the nominal GDP before it can apply a tax rate and arrive at its tax revenues.

If the nominal GDP doesn’t grow as fast as the government anticipated, it can upset all its calculations. Here’s how.

Suppose the government assumes that the nominal GDP of India will grow by Rs 100, and as a result, with a tax rate 15%, it will get an additional Rs 15 in the coming year to spend. But if, for some reason, the nominal GDP grows only by Rs 50, then the total additional money in the government’s hands will be Rs 7.50.

That will either force the government to borrow an additional Rs 7.50 from the market — which, in turn, would mean fewer loanable funds for you to borrow for buying your car or home, and as a result, lead to higher interest rates for everyone in the economy. Or, if the government chooses not to borrow more, it will have to cut its expenditure; this cut could be in the shape of lower R&D funding in India’s defence or lower subsidies for the poor.

The point is, when it comes to the making of the Union Budget, it is the nominal GDP and its growth rate — not the real GDP growth rate that you typically hear about — that matters.

India’s nominal GDP growth rate has been decelerating for years. CHART 1 shows the scale of this challenge.

CHART 1.

In the current year, the nominal GDP is expected to grow by just 8%, but as can be seen from the CHART, this level is quite low when one compares it with the record of the past 20 years; it is witnessing a secular deceleration in the recent past.

Last February, the FM expected India’s nominal GDP to grow by 10.1%. This was already lower than the past levels. Now, the First Advance Estimates released by the Ministry of Statistics peg the nominal GDP growth at 8%.

The first main concern for the FM, then, would be to figure out a strategy to boost the nominal GDP and its growth in the coming financial year.

2. Weak tax buoyancy

In the example above, where at a 15% tax rate, the government expected an additional Rs 15, the assumed tax buoyancy is 1. A tax buoyancy of 1 would mean that if the GDP goes up by 10%, then the tax collections also go up by 10%.

But what if this assumption does not come through? What if, apart from nominal GDP going up by only Rs 50 and not Rs 100, the tax buoyancy was also not 1 but 0.5? In such a scenario, the total additional tax revenues with the government will be only Rs 3.75. That is a sharp drop from the original estimate of Rs 15.

Again, something similar is happening to government finances in the current financial year.

As CHART 2 shows, none of the tax collections are keeping pace with the rate at which the government assumed at the start of the year. The black bars are the rate at which the government had assumed a particular tax collection would grow, and the red bars alongside show the rate at which they have actually grown year-to-date (YTD).

CHART 2.

There is one more detail in CHART 2, sourced from a recent research report by HSBC’s Chief India Economist, Pranjul Bhandari. The growth rate of gross tax revenues of the government is far below even the weak nominal GDP growth rate (shown as a dotted line at 8% level).

What this means is that tax buoyancy has gone for a toss. Look at CHART 3, which brings this out clearly.

CHART 3.

As against an assumed tax buoyancy of 1.1 at the start of the financial year — that is to say that if nominal GDP grows by 1%, then tax revenues will grow by 1.1% — the actual tax buoyancy is half that rate (0.6).

3. Weak private corporate investments

If there is one consistent policy goal of the incumbent government, then it is to boost the private sector’s involvement in the economy. It follows from PM Modi’s view of “Minimum Government” where the role of the government in the running of the economy should be curtailed, and efforts should be made to incentivise the private sector to take the primary role of producing goods and services and, in the process, creating jobs and prosperity.

This policy push has been particularly clear since 2019, when FM Sitharaman introduced a sharp cut in corporate tax rates to incentivise private firms to increase their investments in the economy. This was backed up by a historic increase in the government’s capital expenditure — that is, spending targeted towards building physical infrastructure like roads, bridges and ports, etc. The idea was to bring down the costs of doing business for the private sector. This was further followed by direct subsidies to private firms in the form of the Production Linked Incentive (PLI) scheme.

When none of this worked as expected, the government started cutting the tax burden on consumers — first by repeatedly raising income tax exemption levels and later by cutting the Goods and Services Tax rates — in a bid to incentivise demand and create a business case for the private sector to invest in the economy.

However, notwithstanding all these changes and the high growth rates of the economy, data (See CHART 4) shows that private corporate investment has fallen from the pre-pandemic period (2019).

CHART 4.

The fact is, despite all these efforts, Indian firms are just not selling enough to perhaps make a case for widespread fresh investments. Read the latest GDP column to know more.

What is also worrying is the fact that not only are Indian corporates sitting on the sidelines, but over the past year or so, global investors too have started shunning India (see CHART 5). This has, in turn, hit the rupee’s exchange rate, and created both an economic and a political headache for the FM.

CHART 5.

What should the FM do in this Budget to boost growth, and what new incentives can the FM unveil to lure the private sector to invest more boldly?

Share your views and queries at udit.misra@expressindia.com

Take care,

Udit