Opinion The Budget is cautious. And its balancing act is prudent
Given the still rather fragile global environment, the assumptions made, especially on growth, have been cautious to ensure that there are fewer chances of slippages in fiscal numbers
The main areas for reforms put forth in the budget rightly target the MSME segment, which has also deeply affected by the tariffs issue. The Budget for 2026-27 is more in line with expectations and has struck a balance between fiscal prudence and growth. Budgets are a statement of accounts for the government, which provides incentives through tax measures and a direct push to sectors through various expenditure outlays. Against this background, the budget delivers quite well.
From the market’s perspective, the fiscal roadmap is of primary importance, as the deficit for FY26 was targeted at 4.4 per cent of GDP, which was to be progressively lowered towards the 3 per cent ideal mark. Here, the Budget stands steadfast as the deficit has been kept marginally lower than last year at 4.3 per cent. Given that the GDP growth rate would be 10 per cent, and the tax cuts invoked last year, the incremental revenue would tend to show less buoyancy. Hence, the numbers look pragmatic and not overly optimistic.
This fiscal deficit number is stable, but the market will react to the borrowing numbers. Going by the gross borrowing number of Rs 17.2 lakh crore, yields could harden. However, a large part of this is due to high redemptions, which are at a high of Rs 5.5 lakh crore. Therefore, the net borrowing is stable at last year’s level at Rs 11.7 lakh crore. This should assuage the market, though the final reaction will be seen when it opens on Monday.
On the taxation front, not much could have been expected on direct taxes as the major benefits have already been delivered in the FY26 budget. The same probably holds for indirect taxes, as the GST rates were rationalised in 2025 and though outside of the realm of the budget was significant nonetheless. Some measures that were announced in the area of customs tariffs need to be highlighted. With a series of Free Trade Agreements being signed, it was expected that there would be some degree of rationalisation in customs rates, which has now been achieved.
Two omissions in the budget, which were expected, relate to the withholding tax on FPIs and interest on deposits being taxed differently and on par with equity gains. The FM may have decided that the time was still not appropriate, though the former would have helped a lot from the point of view of getting in more FPI, especially in the debt segment. Households in particular may have to wait for some more time before any tax reforms are undertaken on the treatment of bank deposits.
The strong point emanating from the expenditure side was the continued focus on capital expenditure. The central government has been one of the major drivers of capex post Covid, which is significant because private investment has been slow and narrow-based. There is continued effort in this direction, as can be seen by the projected outlay in the budget at Rs 12.2 lakh crore, with focus on the three nerve centres — roads, railways and defence. There has been a steady increase in the telecom sector, given the emphasis being placed by the government on AI and related issues. The other significant aspect of the capex outlay is the Rs 2.26 lakh crore allocation to states. In a decentralised environment, this is important as states have better last-mile connectivity for localised projects. This will help re-energise states when it comes to capex.
A continued challenge has been the issue of subsidies. Here, the budget has been cautious. The fertiliser subsidy is down by around Rs 15,000 crore, while the food subsidy has been retained. This is an important step and, in a couple of years, the focus will also have to be on moving out of the free food scheme. A roadmap for this is needed. The problem with the food subsidy is that every time the MSP is increased, the subsidy component also tends to increase.
The main areas for reforms put forth in the budget rightly target the MSME segment, which has also deeply affected by the tariffs issue. The creation of the Rs 10,000 crore SME growth fund will help to improve operations. Linking the TReDS platform to purchases by central public sector enterprises and the introduction of a credit guarantee support mechanism through CGTMSE for invoice discounting on the TReDS platform will help smoothen operations.
There has been an almost 20 per cent increase in the allocation for agriculture and rural development from Rs 3.64 lakh crore to Rs 4.36 lakh crore, addressing the needs of less privileged sections. These include the PM-Kisan scheme as well as the newVB-G RAM G.
The Budget is a balancing act between maintaining fiscal prudence and providing incentives to different segments. The focus has been more on the expenditure side rather than income, which dominated in the FY26 budget. Given the still rather fragile global environment, the assumptions made, especially on growth, have been cautious to ensure that there are fewer chances of slippages in fiscal numbers. The thrust has been more on easing the business environment and focusing more on delivering results. At the end of the day, that’s what matters.
The writer is Chief Economist, Bank of Baroda and author of Corporate Quirks: The Darker Side of the Sun. Views are personal
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