India's Budget 2026: Navigating Fiscal Tightening and Stimulus Needs

The Union Bank of India's report highlights the government's focus on fiscal consolidation in the Union Budget, targeting a fiscal deficit reduction to 4.5% of GDP by FY26. Despite challenges, the government aims to balance fiscal prudence with growth incentives to support the economy's gradual recovery.

The Union Bank of India has released a report forecasting the government's keenness on fiscal consolidation and economic growth in the upcoming Union Budget. The government is targeting a reduction in the fiscal deficit to 4.5% of GDP by the financial year 2026, down from an estimated 4.8% in FY25.

The report anticipates an increase in absolute fiscal deficit from the revised estimate of Rs.15.7 lakh crore to Rs.16.2 lakh crore in FY26. This target aligns with the government's strategic roadmap towards macroeconomic stability and managing public debt efficiently.

In efforts to mitigate inflationary pressures and maintain investor confidence in a slowing economy, the government will continue its path of fiscal consolidation. Despite the downward pressure from lower-than-expected capital expenditure and growing subsidy burdens due to geopolitical factors in FY25, the government remains committed to reducing the fiscal deficit steadily.

The analysis points out the underperformance in infrastructure spending against budgeted targets, yet fiscal consolidation is expected to surpass the objectives primarily through expenditure reduction relative to GDP rather than revenue growth acceleration. Achieving a 4.5% fiscal deficit target in FY26 is seen as pivotal to regaining fiscal sustainability post the pandemic-induced high spending.

The UBI report hints at compensating fiscal restraint with reforms aimed at growth, possibly through tax cuts, increased capital expenditure, and sector-targeted incentives. The strategy, however, has elicited mixed feedback, as some experts advocate for bolder stimulus actions to bolster the slowing economic momentum. Nonetheless, the report suggests the government will likely continue emphasizing fiscal conservatism while integrating growth-promoting initiatives in the forthcoming Union budget.

As the government strategizes for the upcoming budget and RBI's prospective monetary policy decisions, the report underscores the importance of these moves in shaping India's economic recovery path and balancing fiscal health with growth objectives. (ANI)

(With inputs from agencies.)