The best indicator of the importance of announcements made by the Finance Minister Nirmala Sitharaman in her budget speech for 2026-27 is in page 24 of a document titled ‘Implementation of budget announcements of 2025-26’. In her last year’s budget speech, the FM had made a grandiose announcement with loud thumping of desks, of a scheme to ‘make India a global hub for toys manufacturing’. Page 24 tells us that mere ‘inter-ministerial consultations have been completed’ in a full year since that announcement.
So, the FM’s announcements of new schemes for manufacturing everything from seaplanes and sports goods to shipping containers and biopharma products in this year’s budget can be dismissed easily as hollow rhetoric. Recall that the Prime Minister had announced ‘Make in India’ to double our manufacturing base with much hoopla in 2014, when manufacturing was 17 percent of the gross value added. Forget doubling, manufacturing has fallen to 13 percent of GVA now.
The lesson is clear—to boost manufacturing, the government has to get out of the way, not get in the way with schemes and announcements. The annual budget exercise must be a dreary display of government finances, how and how much it plans to raise money from and spend on. Every budget faces demands to lower taxes, spend more on welfare and keep debt/deficit low, which is always an impossible trinity.
GST is the largest source of tax revenues for the Union. But the Union budget has no role in it. The GST rates that determine the amount of revenues are set by the GST Council outside of the annual budget show. Recall that the GST rates were cut and rationalised in September 2025, leaving a ₹1.3-lakh-crore hole in the Union government’s finances.
The FM had no room to tinker with corporate and personal income taxes, which account for 60 percent of tax revenues, to fill the GST hole next year. So, she resorted to raising transaction taxes in the stock market and basic excise duties on petroleum and sin goods to fill half the GST hole.
On the expenditure side, the FM surprised with a 40 percent increase in allocation for MGNREGA (new and old), perhaps to quell the opposition’s fierce attack. Capital expenditure continues to be the charm offensive for the Modi government with an allocation of nearly a quarter of the total spend for next year, the highest ever. Overall, the government is projected to spend over ₹53 lakh crore, while it earns only over ₹36 lakh crore.
This is not new and governments over several decades have always spent more every year than they earned. The gap was financed with debt, which has accumulated so much over decades that more than a whopping 40 percent of what the Union government is expected to earn next year goes in interest payments.
This year marks a milestone in India’s budget history when the government shifts focus on reducing accumulated debt from just annual deficits. Global ratings agencies and investors evaluate a nation’s debt-to-GDP ratio before assigning ratings and making investment decisions that impact a nation’s currency, borrowing ability and foreign investment. Laudably, the FM has promised to reduce the Union government’s debt-to-GDP ratio from the current 56 percent to 50 percent by 2031.
But what matters to ratings agencies and investors is not just the Union government’s debt-to-GDP, but that of the Union and all states combined. States collectively spend ₹63 lakh crore, much more than the Union. States have an accumulated debt of ₹104 lakh crore, half the Union’s. However, the catch is that while the Union government’s debt-to-GDP is falling, states’ is rising rapidly. Regardless of what the FM wishes in the budget, the nation’s ratings and currency strength depend on how well the states manage their finances.
Even once well-managed states like Tamil Nadu and Punjab have seen debt levels increase 10-fold in the last 15 years while their GDP grew only four-fold, thus leading to an alarming rise in their debt-to-GDP ratio. The way for states to reduce their debt levels, similar to the Union, is either to increase revenues or decrease expenditure or both. The biggest source of revenue for states is GST, which is outside the sole control of the state or the Union government. So, the only remaining option for states is to reduce expenditure to control its debt levels, which is beyond the realm of the Union government. In short, the nation is entering a phase where after seven decades of the Union government managing the nation’s economy, that responsibility has now shifted to the states as a whole.
If the FM appeared listless and boring in Budget 2026, perhaps this was one major reason. She has no control over either the largest source of revenues (GST) or the largest basket of expenditure (states). The Union government still retains control on how much states can borrow but India’s complex political diversity will wrest even that away from the Union government soon.
The big takeaway this year is how the Union budget will start to matter less and less in the future, as economic attention and importance shifts to the states. What India needs is a ‘one nation, one budget day’ where all states’ finance ministers present their budgets the same day and state finances garner the required national attention vis-à-vis the media hyperbole over the Union budget.
Praveen Chakravarty | Chairman, All India Professionals’ Congress and AICC Data Analytics Department
(Views are personal)