Tightrope act: The budget deftly balances divergent imperatives

Its expenditure strategy creates space for future capital outlays but evolving economic conditions must be kept under watch

- Prachi Mishra, Shohan Mukherjee & Ankita Nair

India's budget for 2025-26 demonstrates a careful balance between an unwavering focus on macroeconomic stability by continuing on a path of fiscal prudence and addressing growth concerns. It comes after a strong fiscal performance in 2024-25, when the government managed to outperform its fiscal targets, achieving a deficit of 4.8% of GDP against the budgeted 4.9%, primarily through reduced capital expenditure.

Notably, fiscal consolidation remains the budget's primary focus, with its fiscal-deficit target set at 4.4% of GDP, a further reduction of 0.4 percentage points. This is underpinned by conservative assumptions, including nominal GDP growth of just above 10% and its measured expectation of tax buoyancy at 1.07, after the highs of 1.40 in 2023-24 and 1.15 in 2024-25.

The quality of spending has also improved; the ratio of capital-to-current spending rose from about 20% in 2021-22 to stabilize at about 30% in 2023-24 and 2024-25, and a similar pattern will be seen next year. To those saying that central capital expenditure has hit a ceiling, this budget is actually freeing up fiscal space for the future. The devil lies in the details, and here, the government's clever strategy deserves a closer look.

The government plans to reduce its budget deficit mainly through efficient revenue account management and significantly limiting increases in day-to-day spending. While investment spending is set to grow by 10.1% (about matching nominal GDP growth), regular operational spending is planned to increase by only 6.7%.