FOR CONSISTENCY AND CALCULATED RISKS

THE 2026-27 budget is being presented at a time of rare macroeconomic stability in Indiastrong growth with low inflation.

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This is a result of the government prioritising economic stability over short-term growth imperatives: a conservative and predictable fiscal policy and better expenditure quality.As the immediate impact of a reduction in fiscal deficits is to slow the economy, it can be politically costly. India bringing the deficit ratio back to pre-pandemic levels is a rarity among major economies. The medium-term impact, the result of the government limiting its borrowing, is to bring down interest rates.By first laying out a medium-term fiscal path and then sticking to it, the government has brought the cost of capital down to low levels rarely seen in non-crisis times. This is a remarkable achievement, as a high cost of capital has been a competitive disadvantage for the Indian economy over the past few decades.

The hard miles on fiscal consolidation have been crossed, and the annual reduction in the fiscal deficit need not be meaningful going forward to meet the government's 50 percent debt-to-GDP ratio by 2031. From 0.5 percent of GDP in 2022-23, 0.8 percent each in 2023-24 and 2024-25 and 0.4 percent in 2025-26, the reduction in fiscal deficit need not be more than 0.2 percent in 2026-27. This means that the headwinds to economic growth from fiscal consolidation are now largely behind us. The Economic Survey prescribes a medium-term target of 6 percent for the government (Centre plus states), consistent with the government's debt-to-GDP target, and is not very far away from the 6.6 percent we expect next year.

The 16th Finance Commission report tabled with the budget will affect the Union's arithmetic, too, via transfers to states: the devolution ratio (share of centrally collected taxes given to states), grants and other transfers. Our 2026-27 budget assumptions assume a status quo.