India's FY26 Budget: Balancing Fiscal Discipline and Developmental Goals

The FY26 Union Budget is poised to emphasize fiscal consolidation with a projected deficit of 4.5% of GDP. Anticipated measures include supporting consumption, bolstering manufacturing, agriculture, and infrastructure. Tax revenue is set to rise, while strategic reforms aim to enhance sectors like EVs, banking, and healthcare.

The forthcoming FY26 Union Budget is expected to showcase the Indian government's dedication to fiscal consolidation, with the fiscal deficit aimed at 4.5 percent of GDP, as highlighted by CareEdge Ratings. Sachin Gupta, Chief Rating Officer, emphasized the budget's target to stimulate consumption and enhance manufacturing competitiveness to foster job creation and leverage India's demographic potential. Enhanced focus on agriculture is also anticipated through increased allocations for agricultural research, farmers' welfare, and policy reforms aimed at boosting sector productivity. Continued capital expenditure in closing infrastructure gaps, notably in power and transportation, along with stringent fiscal discipline to mitigate the debt-to-GDP ratio, remains crucial.

While gross tax revenue is projected to grow by 10.4 percent in FY26, surpassing the nominal GDP growth of 10.3 percent, direct tax collections may face hurdles due to forecasted tax reliefs. Nevertheless, corporate tax collections should improve with the economic rebound. GST collections are expected to see steady growth, while excise duties will likely stay low due to the special excise duty cuts on domestically produced crude oil. Customs duties are positioned for a rise due to recent hikes on edible oils and expected reversals in gold duty cuts.

The budget's capital expenditure is slated to jump by 19.8 percent, reaching Rs11.5 trillion in FY26 after underwhelming results in FY25. The expenditure quality is predicted to improve with a healthier capex-to-revenue spending ratio of 0.30. The fertilizer industry anticipates Rs1.75 lakh crore in subsidies, with reforms expected in import duties on key raw materials and a push for organic fertilizers. Continued focus on electric vehicle infrastructure and equitable incentives for EV components is on the cards. The banking sector seeks incentives for deposit growth and credit support for MSMEs, while the insurance industry proposes capital infusion, tax relief, and expedited insolvency resolutions. Meanwhile, tourism calls for infrastructure designation and tax rationalization to drive sustainable growth. The pharmaceutical sector anticipates increased budget allocations for health, tax reforms for R&D, and policy adjustments to stimulate sector vitality.

(With inputs from agencies.)