Union Budget 2026-27: Business as usual with capex push, modest fiscal consolidation and risks

India's budget speeches often tend to disappoint, especially those with unfailing optimism who tend to anticipate 'historic' or 'game-changing announcements.' Disappointment might, however, be the folly of unrealistic expectations that hope a budget to contain everything from a crisp long-term blueprint for the economy to mega tax breaks for industry and individuals. But budget-making is about finding the right balance between diverse pulls and pressures, and enunciating nuts and bolts of government finances. From this perspective, this budget was business as usual.

Fiscal consolidation is somewhat gentler than many had anticipated, taking fiscal deficit down from 4.4% of GDP to 4.3%, which leaves debt-to-GDP ratio at 55.6%, a tad higher than the forecaster consensus of 55%. GoI plans to spend ₹12.2 lakh crore on capex in 2026-27, up from ₹10.9 lakh crore in 2025-26. This recognises that with elusive private investments and geopolitical risks hanging over exports, GoI cannot afford to step off the gas too quickly.

2026-27 nominal GDP growth that underpins the budget is conservatively assumed at 10%. There's a likely upside to this. To fund its deficit, GoI will borrow ₹11.7 crore on the net--adjusting for repayment of debt that needs to repaid next fiscal, a marginal increase over this year's ₹11.3 crore, relying heavily on small saving to fund the rest.

The budget's industrial strategy tries to achieve 3 things:

∙ Pat the electronics sector on its back, a sector that has led the export charge with a larger outlay to the scheme.

∙ Fight damage done by rising Trump tariffs to labour-intensive sectors like textiles and MSMEs.

∙ Derisk critical supply chains like rare earths, chemicals and semiconductors by incentivising domestic production.

What are the risks then?

∙ Fisc wobbles Growing fiscal imbalances of states and the consequent need for them to borrow from the market remains a source of worry. Despite a somewhat reassuring borrowing estimate for the centre, states' cash calls on the bond and money markets may push interest rates up, potentially 'crowding out' others.

∙ Rural rozgar Migration from MNREGA to VB G-RAM-G tied to centrally funded projects presents a near-term risk. The new scheme guarantees 120 days instead of the earlier 100. While budget allocation for 2026-27 seems adequate, transition to this completely restructured scheme--with a significantly reduced role for local bodies in identifying employment, and enhanced financial burden on states--presents a risk. If migration is not seamless, or states face funding problems, it may impinge on rural consumer demand and overall growth.

∙ Mega City, Maha Neglect? Budget ignores deteriorating quality of life in mega cities, the most visible problem being air pollution. It chooses to pay attention to smaller cities through its financial allocations.

∙ Megacities are not just an agglomeration of houses and offices. They are vital networks that foster innovation and investment. The decision to live in a city is tied to bringing in capital and producing locally. One appreciates that city governance is in states' domain. But it's time the centre steps in to address the issue of 'livability' of India's metropolises.

While GoI has done well in building both physical and digital infra, India lags behind in innovation. India needs to remain competitive not just in adopting AI and RE tech, but also in finding a firm footing in the value chain of these. GoI needs to think about its quality of capex and prioritise R&D spending. One hopes the next budget fulfils some of these wishes.