Fiscal Virtue, Growth Be Damned: Budget 2026 Misses A World In Flux
The Budget prioritised fiscal discipline over investment appeal, cutting the deficit to 4.3%, but markets reacted sharply, sliding 1,100 points.
The Gist
Fiscal Discipline vs. Economic Growth
- Fiscal deficit targets are met, but total expenditure is reduced.
- Investment in defence and education is crucial for strategic autonomy and workforce development.
- Current budgetary measures lack urgency in addressing global geopolitical shifts.
It is no surprise that the stock market gave the Budget a thumbs down. Increasing the securities transaction tax (STT) — it makes every trade more expensive, and makes fine pricing of derivatives to hedge against the entire range of risk impossible — is bad enough.
The Budget also acted as if the Supreme Court ruling disallowing Tiger Global’s capital gains tax exemption, claimed in the Flipkart stake sale, was of no concern to the government. The ruling, which nullifies the grandfathering of tax exemptions availed for capital inflows routed through Mauritius before 2017, has given jitters to all investment inflows into India.
How stable is any tax assurance held out by the government of India? Is it any wonder that India is not a red-hot destination for capital scouring the world for profitable deployment?
Hardly The Right Prescription
But the government has pleased the credit rating agencies, hasn’t it, making steady progress on fiscal correction? The Gross Fiscal Deficit is slated to come down to 4.3% of GDP, after having met the target of 4.4% of GDP for 2025-26. The government compressed its spending to meet the fiscal deficit target for the current fiscal: capital expenditure has been almost Rs 25,000 crore lower than budgeted.
The total expenditure for the next fiscal is slated to come down to 13.6% of GDP from13.9% of GDP last year. At a time when corporate earnings are anaemic and private capital investment reluctant, except in some infrastructure-related sectors, the Budget should have aimed for a total expenditure of at least 15% of GDP.
Sacrificing the stimulus flowing from total government spending to flaunt fiscal discipline is hardly the right prescription in an economy lacking growth momentum, except in headline numbers that might well be revised downward in the near future.
No Urgency Or Vision
But the real disappointment is the wholly absent sense of urgency in responding to the rupture in the global order, in which an isolationist US has abdicated its role as geopolitical anchor of a rules-based international order and is no longer a reliable source of support for India, in case of hostile developments on the northern border.
India has to vastly step up its defence outlays and research and development to support strategic autonomy. It has to invest in the education sector at all levels, to create the faculty of critical thinking in its emerging workforce that will find many conventional labour-intensive manufacturing jobs being performed by robots guided by artificial intelligence.
This means the Centre focusing on the responsibilities assigned to it in the Constitution, leaving the states to attend to the areas assigned to them, and saving the funds that the Centre currently lavishes on wanton trespass into the states’ legitimate domain. There has been no such move or thinking in the Budget. Instead, we have yet more strings of central sector schemes in State subjects.
Fueling Tanks, Emptying Plates
The Budget speech made much of promoting animal husbandry. The entire poultry industry is at risk from expensive corn, thanks to the government’s obsession with ethanol blending. Eggs, the cheapest source of vital proteins, see their prices rise as grain becomes the source of 56% of the ethanol produced in India, leaving sugarcane far behind.
The Budget’s heart bleeds for the small and tiny industry, and offers many more new schemes to help them. But the biggest help they need is access to formal credit. For that, NBFCs that lend to small enterprises need to be able to raise money from the bond market, even if they can do that by issuing high-yield bonds. At present, such bonds are deemed subprime.
A vibrant market for corporate debt can emerge in India only when government and corporate bonds form a unified market under SEBI’s control, and derivatives proliferate to hedge against currency, interest rate and credit risk. The steep rise in STT kills the derivatives market, instead of fostering a healthy capital market.
Personal Burden, Corporate Ease
Tax collections should be going up, as India acquires greater sophistication in following up on the audit trail created by GST. Instead, total tax collections as a proportion of GDP are slated to come down marginally in 2026-27, as compared to either of the two previous years. Personal income taxes contribute 20% more to the Centre’s kitty than the tax on corporate incomes does.
This, despite the tiny proportion of Indians who pay income tax — about 6.5% of the population file tax returns, but a good share of them pay no tax, leaving less than 3% of the population to actually pay income tax. Everyone, including the poorest labourer, pays indirect taxes, of course.
The finance minister announced that the government accepts the 16th Finance Commission’s recommendation to devolve 41% of its revenues to the states. This has been the recommendation of the 15th Commission as well. However, actual devolutions are only 34% to 34.6% (target for 2026-27) of the Centre’s collections.
Schemes That Fall Short
The Centre has announced several challenge schemes in the latest Budget, ignoring the failure of the states to make good on previous challenges.
The vaunted schemes on semiconductors fall far short of creating an indigenous ecosystem for all the kit required to not just design but manufacture advanced semiconductors in India. China has managed to do this, even if its chips are not quite of the cutting-edge variety.
The only reason for India to create a domestic supply chain of semiconductors is to insulate itself against the threat of a technology boycott from a temperamental US President. Handing out huge subsidies to American chipmakers to build chips in India does not overcome the threat of such a boycott. Indigenising the entire production process is the only way out. There is no such realisation in the government’s glib, subsidy-heavy policies on this score.
The Saving Grace
It is welcome that the government has identified carbon capture for use and storage as an important part of combating climate change. That ‘use’ calls for extensive research and development. Captured CO2 can well serve as the starting molecule for the entire range of petrochemicals and hydrocarbons currently derived from crude and natural gas. Only then will capture become viable and commonly deployed. There is no thrust on such research, however.
The government does well to recognise the importance of municipal bonds for urban development. But how can cities issue municipal bonds in the absence of a fiscal base to service such bonds at the disposal of city governments? Specific incentives are called for states to create such a fiscal base, and for cities to tap their property tax base to the fullest extent possible.
While some schemes, such as for coconuts and cocoa, and high-speed trains, benefit Tamil Nadu and Kerala, headed for elections, the Budget has not indulged in excessive electioneering. That is the saving grace.
