Budget 2026: When Fiscal Discipline Masks Deeper Economic Risks

The Union Budget 2026 has been formulated and presented against an unusually challenging economic backdrop, marked by strong headwinds on both global and domestic fronts.

- Dr. Rajiv Khosla

Internationally, the imposition of steep 50 per cent tariffs by the United States under the Trump administration, the withdrawal of the European Union's Generalised System of Preferences (GSP) that had allowed Indian exports preferential access, muted FDI inflows, and sustained FII outflows exceeding ₹1.6 lakh crore during 2025 have weakened external conditions. Domestically, GST rate rationalisation, the ₹12 lakh income-tax exemption, weak corporate earnings in the third quarter of FY 26, and a liquidity-constrained banking system reluctant to fully transmit interest-rate cuts have intensified fiscal pressures. Against these crosscurrents, the government and its supporters argue that the Finance Minister has preserved fiscal discipline while steering the budget towards long-term growth and demand creation.

The Budget Announcements

The budget proposes to limit the fiscal deficit to 4.3%, marginally lower than last year's 4.4%. Capital expenditure has been raised to ₹12.2 lakh crore, with a strong focus on infrastructure development—roads, railways, high-speed rail corridors, inland waterways, and urban infrastructure. It also seeks to strengthen the education-employment linkage by establishing universities near industrial clusters. In healthcare, the budget outlines plans to expand primary healthcare, digital health services, and medical infrastructure. Measures targeting farmers, small traders, economically weaker households, minorities, senior citizens, and women signal an intent towards inclusive growth. Yet, while the budget appears people-centric at first glance, closer scrutiny suggests that fiscal consolidation remains the government's overriding priority.