
The Union Budget for FY2026 attempts to strike a balance between supporting economic activity and fiscal consolidation, which is quite commendable given India’s current macroeconomic situation and the uncertain global environment. While a broad look at the budget math suggests that the numbers seem credible, there are a few areas of concern.
The assumption for the nominal GDP growth of 10.1% in FY2026 seems plausible and is similar to ICRA’s estimate of 10.0%. However, the growth in gross tax revenues of 10.8%, which implies a tax buoyancy of 1.1, seems a bit high, given the sizeable relief that was announced on the personal income tax front.
The Government’s assumption of 13.1% expansion in income tax collections (excluding STT) in FY2026 is quite substantial, in light of the tax cuts, which are expected to lead to a revenue loss of Rs. 1.0 trillion. Besides, the base is also high; the projected growth in such collections is pegged at 18.9% for FY2025 as per the revised estimate (RE).
Additionally, on the non-tax revenues front, the Budget has pencilled in a 9.8% growth in FY2026, which seems optimistic. This is primarily stemming from an uptick in dividends and profits, including those from the Central Bank, to a record Rs. 3.3 trillion from the RE of Rs. 2.9 trillion for FY2025.
With the decline in interest rates across most Advanced Economies, the moderation in the RBI’s holdings of domestic securities and a likely increase in provisions amidst elevated volatility in the currency markets, we had expected a modest dip in the Central Bank’s dividend transfer in FY2026 vis-à-vis FY2025. The realisation of the budgeted numbers on this account would be crucial to bolster spending through the fiscal.
Finally, shortfalls in disinvestment receipts have been a recurring source of stress on the revenue side. The Government has budgeted a target of Rs. 470 billion on this account in FY2026, marginally lower than Rs. 500 billion that was budgeted for FY2025. The Government has highlighted that actual realisation of other miscellaneous capital receipts depends on the prevailing market conditions during the year. Simply going by the trend seen across years, a shortfall on this account would not be surprising, although the budgeted amount itself is not very large.
On the expenditure side, the hike in revex and capex is moderate at 6.7% and 10.1%, respectively in FY2026. This entails a continued improvement in the spending mix, with capex accounting for 22.1% of the total spending as against 21.6% estimated for FY2025 and only around 12% in FY2020. However, the incremental capex of Rs. 1.0 trillion in FY2026 vis-à-vis FY2025 can partly be attributed to ‘new schemes’, wherein no details are available at present. This head accounts for more-than-half of the Rs. 1.0 trillion miss in the capex target for FY2025, which leads us to wonder if a similar fate would unfold in FY2026.
Overall, the fiscal metrics and the borrowing numbers are likely to be received well by the bond markets. The compression in the fiscal deficit to 4.4% of GDP from 4.8% in FY2025 is entirely led by the 41 bps dip in the revenue deficit. In fact, the effective capital expenditure of the Government, which accounts for grants-in-aid for the creation of capital assets, accounts for about 99% of the fiscal deficit in FY2026, up from 84% in FY2025, implying that the Government’s borrowings (from all sources) are only being used to finance capex, which is an ideal scenario.
However, at the same time, other metrics such as the ratio of interest payments to revenue receipts, which has been quite high, is only expected to worsen to 37.3% from 36.9% in FY2025.
(The author is Chief Economist and Head - Research & Outreach at ICRA)