The budget combines strategic ambition with fiscal discipline

Markets that tend to focus on short-term interests may be beginning to recognize the budget’s long-horizon growth impetus

- PRACHI MISHRA & SHOHAN MUKHERJEE

Markets don’t always get it right, especially not immediately. India’s 2026-27 budget sparked an initial selloff, with investors obsessing over the government's elevated headline borrowing.

Indices recovered soon after, aided by positive news on a trade deal with the US. What marks the budget out is its fiscal discipline and strategic ambition. It reveals a government betting on India’s long-term trajectory. After years of successful fiscal consolidation, India is channelling resources towards an essential capacity buildup: infrastructure that works, human capital that competes globally and institutions that enable growth.

Following the 2025-26 pattern, operational spending—administrative costs, central government programmes and overheads—will grow slower than the economy. Revenue spending will continue to fall while interest payments are expected to be contained—both as a proportion of GDP. Revenue expenditure includes grants for capital spending by states. Accounting for these, the effective capital-to-current spending ratio is expected to approach 50% in 2026-27 from less than 40% in 2025-26.

Revenue compression stems from tax measures, with income tax and GST reductions putting money back into citizens’ pockets and stimulating consumption. This has pushed tax buoyancy below one, with a sustained decline expected ahead. Non-tax revenues in 2025-26 beat expectations primarily through telecom licence fees and spectrum charges, which more than doubled. The budget expects these to moderate in 2026-27. Both revenues and expenditures are budgeted to contract sharply relative to GDP—the former by 0.25 percentage points and the latter by 0.30, yielding a 0.05 percentage point fiscal deficit reduction.