
The third edition of TNIE's Shadow Budget 2026 attempts to stay true to its name.
Unlike the previous volumes, Anil K Sood, Founder, Institute for Advanced Studies in Complex Choices, not only punched in revenue and expenditure numbers that Finance Minister Sitharaman is likely to present on February 1 but also provided numbers that are most appropriate for the Indian economy right now. This is the defining element of Shadow Budget 2026. The reasons for deviating from the past are explained elsewhere.
While both estimates aren't markedly different, what sets the Shadow Budget apart is the reallocation of capital as well as revenue resources.
For instance, capital expenditure, the driving force behind Sitharaman's budgets, decidedly takes a backseat, as Sood doesn't see the point of wasting resources when we know that capex isn't really yielding benefits, or the allocation is being used for repaying NHAI loans or simply being parked in various funds and remaining unutilised.
Given the challenging times, he isn't suggesting any significant increase in aggregate size of the budget, as % of GDP. He is suggesting that the next tax revenue level be marginally higher, but non-tax revenue be significantly lower. Instead, going against the grain, he has pitched for a high fiscal deficit, even if it means missing the rolling targets in the medium term.
Sood argues that the government must leave money with the PSUs so that they can participate in kickstarting the virtuous cycle of investment, as private sector continues to be a reluctant investor.
For FY26, he has proposed a Rs 51.20 lakh crore expenditure budget, which is slightly higher than Rs 50.73 lakh crore that Sitharaman is widely expected to present. As for the nuts and bolts of spending, the former significantly varies from the latter. Table 1 below presents the Budget at a Glance.
The above estimates assume the growth in nominal GDP to be 10% for FY26 as against 9.74% in the FY25 revised estimates.
Making the case for reallocation of spending, the Shadow Budget focuses on communications (BSNL), housing and urban affairs, rural development, railways, food and public distribution, health, drinking water and sanitation, besides others to nudge the economy onto a sustainable growth path.
Like Sitharaman, the Shadow Budget does make capex (excluding grants in aid to states for creation of capital assets) its cornerstone, allocating a neat sum of Rs 10.71 lakh crore, or a 12.9% increase over FY25. Continuing with the capex credo, Sood expects the government to peg FY26 capex at Rs 11.18 lakh crore, translating to a 17.9% increase over FY25.
Revenue receipts are estimated at Rs 32.65 lakh crore, as against FY25's revised estimates of Rs 30.82 lakh crore, a growth of 5.9%. This is far lower than the 14.7% budgeted for FY25. But the projected sums are lower than the likely Budget 2026 revenue receipt projections that will likely increase by 8.6% to settle at Rs 33.47 lakh crore for FY26.
Tax revenue (net to centre) is projected at Rs 28.69 lakh crore, as against FY25's revised budget estimate of Rs 25.53 lakh crore. Shadow Budget's 12.4% in tax revenue is slightly higher than FY25's revised estimate of 9.7%.
Within taxes, direct taxes are projected at Rs 25.13 lakh crore, with personal income tax collections pegged at Rs 13.36 lakh crore, higher than corporate taxes estimated at Rs 11.76 lakh crore. Central GST collections are projected at Rs 9.95 lakh crore, while GST compensation cess will likely rake in Rs 1.65 lakh crore.
Table 2 below provides the details for tax revenue by source.
Sood is suggesting a major rejig of corporation tax, where they start sharing a larger tax burden, as the promised growth in investment and employment is unlikely to materialise as long as growth in demand remains sluggish. He is, therefore, suggesting that middle-income families be granted significant relief and we bite the bullet on capital gains tax, particularly the gains arising from speculative activities. He argues that the stock market can take care of itself, and the government does not have to worry about that.
Coming to non-tax revenue, the Shadow Budget takes a bold guess, projecting a decline of 25.2% in FY26 as against FY25's 31.8% growth. In absolute numbers, non-tax revenue will likely fetch Rs 3.96 lakh crore in FY26 compared to FY25's revised estimate of Rs 5.29 lakh crore. On the other hand, it's likely that the government may stick to a below trendline growth projection of about 3.1%, or an estimated Rs 5.46 lakh crore non-tax revenue in FY26. Sood argues that the government must stop seeing PSUs profits as a means for fiscal consolidation. PSU surplus must be used to help India make energy transition, invest in technologies that will enable participation in Industrial Revolution 4.0.
In all, gross tax revenue is pegged at Rs 43.05 lakh crore, a healthy 15.25% increase over FY25, while the government may peg it at Rs 41.48 lakh crore.
Coming to expenditure, revenue expenditure is pegged at Rs 40.49 lakh crore, 11.27% higher than FY25's revised estimate of Rs 36.91 lakh crore. The Shadow Budget assumes a slightly higher revenue expenditure than what the government will likely peg at about Rs 39.54 lakh crore.
As for capital expenditure, FY25 will likely see significant underspending. While the July budget pegged effective capex at Rs 10.71 lakh crore, revised estimates based on actuals till November, indicate the final tab to be roughly Rs 9.49 lakh crore, against the auspicious looking budget number of Rs. 11.11 lakh crore. Given the Shadow Budget's 12.9% increase in capex for FY26, the effective capex as a percentage of GDP is pegged at 3.01% compared to FY25's revised estimate of 2.93%.
Table 3 provides the details of capital expenditure by the ministry.
Sood expects the government to underspend during the current year, given that budget had parked nearly 1.5 lakh croes under the department of economic affairs and telecommunication for a new scheme and equity for BSNL. HIs assessment is that BSNL may not get anything more than the money required for the recently announced VRS and there is very little possibility of a new scheme being launched during the next two months. He, therefore, argues that there is no point in budgeting sums that are unlikely to be spent, given the government policy.
As for department-wise allocations, Sood's sums vary from that of the government.
While he did cut the biggest cheque for the Ministry of Roads and Highways earlier, he, however, lowered the sum and redirected the savings to other needy segments. For FY26, the capex is pegged at Rs 2.67 lakh crore, lower than Rs 2.72 lakh crore allocated during the July budget for FY25. On the other hand, Sitharaman is likely to continue the capex binge allocating a tidy Rs 2.85 lakh crore for roads and highways. Sood argues that NHAI should review its strategy and slow down investment in expansion projects and repay some of its debt that it can reduce the toll burden which is already at 0.24% of GDP.
Likewise, defence capex too was trimmed in Shadow Budget to Rs 1.6 lakh crore for FY26, from Rs 1.72 lakh crore earmarked in FY25. The savings are redirected to railways, whose capex is pegged at Rs 2.67 lakh crore, up from Rs 2.52 lakh crore in FY25.
The biggest percentage-wise increase goes to the Ministry of Consumer Affairs, Food and Public Distribution at Rs 1,850 crore, up from barely Rs 110 crore in FY25. The proposed sums should help build warehousing facilities besides others. While the absolute amount is still less than what is required, it is necessary to start building agri-infrastructure in the public sector so that the farmers don't have to be at the mercy of private sector investment decisions, Sood argues.
The revised budget estimates draw heavily on government spending between April and November, FY25, and it appears certain that several departments may under spend this fiscal.
Sood proposes a significant allocation for the Housing and Urban Affairs minsitry, with budget allocations rising to Rs 44,566 crore, up from Rs 28,628 crore in FY25. The increased allocation is meant for public housing – an investment that will help reduce the cost of living for urban low-income families.
Though Sood favours focus on healthcare, the Shadow Budget sees a lower capex spending at Rs 3,565 crore as against Rs 3,613 crore allocated in FY25, as the actual spend till November 2024 was just 2,062 crore.
Coming to revenue expenditure, Sood’s estimates are based on the premise that the government will not work on getting a fair price for farm produce and, therefore, the consumption and production subsidies will have to continue. He brings our attention to his earlier paper in this context: How real is our farmers' angst?
Table 4 below provides the details of revenue expenditure by the ministry.
Subsidies are likely to increase in FY26 to Rs 4.1 lakh crore, with an outgo on food comprising more than half at Rs 2.25 lakh crore. Sood argues that the food subsidies must be reduced only when the level and quality of employment increases.
Another point of departure for Sood is the allocation of revenue expenditure for health and family welfare, drinking water and sanitation, and housing and urban affairs.
The fiscal deficit is pegged at 5% of GDP for FY26. In absolute numbers, the Shadow Budget estimates borrowings and other liabilities at Rs 17.92 lakh crore for FY26, as against FY25's revised estimate of Rs 15.08 lakh crore. As for the government, given its dedication to fiscal consolidation, FY26 fiscal deficit may be pegged at 4.59%, with borrowings marginally rising to Rs 16.37 lakh crore in FY26 over FY25.