By Deepanshu Mohan
As India approaches the Union Budget 2026–27, it is critical to analyse the macro-fiscal outlook. In January 2026, the IMF raised India’s 2025–26 growth forecast from 6.6 percent to 7.3 percent, close to the government’s 7.4 percent advance estimate. Yet, it also projected the overall growth moderating to 6.4 percent in 2026–27 and 2027–28, with global growth around 3.3 percent, limiting external support.
This mixed outlook signals the concerns emerging from a decade-long fiscal strategy that has been a confused one, guided often by political means than hard numbers. Since 2014, successive Union budgets have relied on increasing public capex as the primary growth lever, raising it from 1.6 percent of GDP in 2014–15 to 3.1 percent in 2025–26 (BE), while adhering to a consolidation path targeting a 4.4 percent fiscal deficit in FY26.
The result is a distinct fiscal map: capital outlays expanded as revenue space narrowed. Revenue expenditure fell from 88.56 percent of total spending in 2014–15 to 77.86 percent in 2025–26 (BE), defining the structural constraints shaping forthcoming fiscal choices.
A decade of budgets exposes a core fiscal tension: surging public capex alongside a persistently stressed revenue account.
Pre-pandemic RD stood near US$ 5.44 billion (Rs 5 lakh crore), peaking at US$ 12.09 billion (Rs 11.11 lakh crore) or 7.3 percent of GDP in 2020–21 against an FD of US$ 20.14 billion (Rs 18.49 lakh crore), with over half borrowing funding revenue spending. Though RD falls to US$ 5.70 billion (Rs 5.24 lakh crore) by FY26 (BE), rising interest costs keep the RD–FD gap structurally binding, constraining welfare.
Source: Budget at a Glance (FY17–FY26)
This borrowing pattern anchors consolidation. The glide to a 4.4 percent fiscal deficit in FY26 reflects restraint in revenue spending rather than improved buoyancy, even as capex is protected. Capital outlays rose from US$ 3.05 billion (Rs 2.8 lakh crore) in FY16 to US$ 6.57 billion (Rs 6.03 lakh crore) in FY22, surging to US$ 11.09 billion (Rs 10.18 lakh crore) in FY25 and US$ 11.21 billion (Rs 11.21 lakh crore) in FY26 (BE). Meanwhile, the fiscal deficit widened from US$ 5.82 billion (Rs 5.34 lakh crore) in FY17 to US$ 19,13 billion (Rs 17.55 lakh crore) in FY23 before easing to US$ 17.10 billion (Rs 15.69 lakh crore), with the revenue deficit following a similar arc.
Expenditure quality mirrors this shift. RBI data show human-capital sectors flat between 2021–22 and 2024–25, while transport rose from US$ 2.32 billion to US$ 3.28 billion (Rs 2.13 to Rs 3.01 lakh crore) and energy from US$ 2.46 billion to US$ 3.09 billion (Rs 2.26 to Rs 2.84 lakh crore).
States reflect the same pattern. Social spending rose from US$ 259 billion (Rs 23.7 lakh crore) in 2023–24 (RE) to US$ 286.7 billion (Rs 26.3 lakh crore) in 2024–25 (BE), but its share stayed near 41–42 percent. Uttar Pradesh remains below 40 percent, Maharashtra under 45 percent, Gujarat at 38–39 percent. Subsidies rose from US$ 48.4 billion to US$55.4 billion (Rs 4.44 to Rs 4.71 lakh crore). Tamil Nadu’s social share stagnates at 35 percent alongside US$ 17.5 billion (Rs 1.47 lakh crore) subsidies, while Karnataka sustains ~42 percent with US$ 5.6 million (Rs 47,700 crore)—showing welfare is maintained, not reprioritised, as capex bets persist.
Investment response
India’s recent fiscal strategy has rested on capex-led growth, with public investment positioned as the primary engine amid weak private demand and wage growth. Union capital expenditure rose from US$ 28.3 billion (Rs 2.38 lakh crore) in 2015–16 to US$ 122 billion (Rs 11.21 lakh crore) in 2025–26, with a sharp post-pandemic acceleration from US$ 47.85 billion (Rs 4.39 lakh crore) in 2020–21 to US$ 79 billion (Rs 7.28 lakh crore) in 2022–23 and US$ 110.9 billion (Rs 10.18 lakh crore) in 2024–25.
Private investment, however, remains the weakest link. RBI project finance data show 907 projects sanctioned in 2024-25 with a total cost of US$ 43.79 billion (Rs 3,67,973 crore), down from US$ 46.92 billion (Rs 3,91,003 crore) in 2023–24. Across all financing channels, investment intentions fell from US$ 65.1 billion (Rs 5,47,734 crore to US$ 59 billion (Rs 4,97,235 crore), underscoring a decoupling between public capex momentum and private risk appetite.
Sectorally, private investment remains infrastructure-heavy. Power alone accounts for 50.6 percent of project costs, followed by roads and bridges, while manufacturing sectors—metals, textiles, food processing, chemicals retain small and often declining shares. Spatial concentration compounds this skew: Gujarat and Maharashtra account for 21.4 percent and 15.1 percent of project costs in 2024-25, and five states together nearly 60 percent.
Source: Government of India, Ministry of Finance. Union Budget at a Glance, 2016–17 to 2025–26. RBI Private Corporate Investment: Growth in 2024-25 and Outlook for 2025-26.
Fiscal consolidation under strain
Tax revenue has become the linchpin of India’s fiscal arithmetic. The FY26 budget assumes gross tax collections of US$ 465.4 billion (Rs 42.70 lakh crore), a 10.8 percent increase over FY25 actuals, despite a recurring pattern of optimistic buoyancy assumptions. FY25 revised estimates fell short as higher devolution to states US$ 140.3 billion (Rs 12,87,000 crore) compressed the central government’s net revenues, forcing consolidation to rely on borrowing rather than durable revenue gains.
This dependence is compounded by chronic disinvestment underperformance. Budgets routinely project US$ $5.45 billion-US$ 7.8 billion (Rs 50,000–78,000 crore) annually, yet realisations lag; FY25 again missed its US$ 5.45 billion (Rs 50,000 crore) target. The result is rising debt service costs. Interest payments climbed from ₹US$ 87.54 billion (Rs 7.31 lakh crore) in FY22 to ₹US$ 152.8 billion (Rs 12.76 lakh crore) in FY26 (BE), a 74.56 percent increase, now absorbing roughly 37 percent of revenue receipts and narrowing fiscal space for welfare and development.
Household balance sheets show mounting strain. RBI data indicate financial liabilities rising from 35.8 percent of GDP in June 2022 to 41.3 percent by March 2025, alongside growing reliance on personal loans, housing, consumption and NBFC credit.
At the same time, net financial savings have weakened, falling from 4.9 percent of GDP in FY23 to 6.0 percent in FY25 amid sharp quarterly volatility. Rising debt with fragile savings signals stress among households expected to sustain demand and private investment.
Source: RBI Private Corporate Investment: Growth in 2024-25 and Outlook for 2025-26.
Fiscal federalism has tightened: despite tax devolution rising to US$ 1.70 billion (Rs 142.2 lakh crore) in FY26, expanding cesses centralise revenues, leaving states with shrinking autonomy to fund welfare as the central government prioritises capex.
The fiscal map reveals three nested fragilities. Consolidation has been sustained through revenue optimism, weak disinvestment offset by higher borrowing, and rising fiscal stress on households and states an equilibrium financed by constrained peripheral actors rather than broad-based growth.
Over the past decade, the government has protected capex by compressing revenue expenditure, relying on optimistic tax projections and absorbing weak capital receipts through debt. This has preserved headline discipline and infrastructure momentum but shifted adjustment costs onto households and states.
Crucially, the model’s central promise remains unmet. Despite unprecedented public capex, private investment remains infrastructure-heavy, geographically concentrated and absent in manufacturing. What emerges is not policy incoherence, but structural limits: a capex-led strategy increasingly strained as consolidation tightens, narrowing India’s future fiscal choices.
Deepanshu Mohan is Professor of Economics and Dean, O.P. Jindal Global University, Sonipat, Haryana. He is currently Visiting Professor, LSE, and an Academic Research Fellow, University of Oxford.
Saksham Raj, Aditi Lazarus and Nagappan Arun are students at O.P. Jindal Global University and research analysts with the Centre for New Economic Studies (CNES).
Originally published under Creative Commons by 360info™
