Union Budget 2026–27: Growth and Structural Transformation

Introduction

The Union Budget 2026–27 has come amid an uncertain and fragile global economic scenario caused by geopolitical tensions, trade fragmentation, and elevated sovereign debts across developed and developing economies. In contrast, domestic economic performance showed resilience. With an estimated strong growth rate of real GDP of 7.4 per cent in the fiscal year 2025–26, the Indian economy emerged as the fastest-growing major economy for the fourth consecutive year. Robust domestic demand, enhanced capital outlays, sound macroeconomic fundamentals, and prudent monetary and fiscal policies have accentuated the pace of growth.

The Union Budget for FY 2026–27 emphasises policy continuity and fiscal consolidation and reflects a structural shift in the role of government from direct provider of goods and services to a facilitator of private investment and market-led growth. With enhanced capital expenditure, along with reduced fiscal deficits and debt-GDP ratio, the budget reaffirms the government’s belief in investment-led growth and its commitment to fiscal prudence and inclusive development.

Revenue and Expenditure Trends

Traditionally, the Union Budget presents estimates for three consecutive years¹. Total government expenditure, which peaked at 17.7% of GDP during the pandemic year 2020–21, has since moderated and stabilised at around 15% of GDP. In contrast, and more importantly, effective capital expenditure has steadily increased from 2.6% of GDP in FY 2020–21 to 4.4% in FY 2026–27 (BE). Revenue expenditure is on a declining trend without compromising developmental expenditure. This compositional shift reflects a systematic transition from consumption-led fiscal expansion to asset creation and public investment.

In terms of absolute figures, Union Government expenditure has more than doubled over the past decade, from ₹21.4 lakh crore in FY 2017–18 to ₹53.5 lakh crore in FY 2026–27 (BE). However, this fiscal growth has been broadly aligned with economic growth, reflected by a more stable expenditure-to-GDP ratio. The upward trend reflects growing developmental commitments, infrastructure expansion, and higher capital allocations.

The revenue profile of the budget shows that Union Government revenue mainly comes from tax sources. About two-thirds of revenue comes from taxes, where income tax, corporation tax and GST are the largest contributors, reflecting improved compliance and formalisation of the economy. Government borrowings also significantly contribute to overall revenue, but a declining primary deficit indicates that these borrowings are largely used to meet interest liabilities.

The expenditure profile of the budget 2026–27 shows that a significant portion of the total expenditure is committed expenditure, wherein interest payments and states’ share of central taxes account for over 40 per cent of the budget. Further, defence expenditure and subsidies have about 18 per cent share. This profile indicates that the government has limited flexibility in its expenditure due to mandatory obligations, while the Fiscal Responsibility and Budget Management (FRBM) Act constrains its debt-raising capacity.

Trends in Revenue from Direct and Indirect Taxes

Sustained buoyancy of central taxes over the last decade has strengthened the Centre’s fiscal position. Gross tax revenue remained mostly stable at around 11–12% of GDP, showing improved revenue productivity of central taxes. The share of direct tax relative to indirect taxes has been rising over this period due to greater tax elasticity with respect to income growth and the growing formalisation of the economy.

The Threefold Approach in the Budget

The budget introduces a threefold duty-based approach. The first duty is to accelerate and sustain economic growth; the second is to fulfil people’s aspirations and build their capacity; and the third is to ensure that growth provides inclusive access to resources and opportunities. This reflects a departure from fragmented, piecemeal policymaking to an integrated framework where economic growth, human capital, and inclusion support each other. The budget emphasises continuous, adaptive and forward-looking structural reforms, a robust and resilient financial sector, and cutting-edge technologies, envisaging greater complementarity between state and market, or public and private sectors.

Scaling up Manufacturing

Toward the first duty of promoting economic growth, the budget proposes a strategic boost for manufacturing by focusing on legacy industrial sectors, MSMEs, infrastructure, energy, and city economic regions. Key steps include: biopharma SHAKTI (with an expenditure of ₹10,000 crore over the next five years) to develop India as a global biopharma manufacturing hub; India Semiconductor Mission 2.0; boosting expenditure on the Electricity Components Manufacturing Scheme; the establishment of rare earth corridors; and three dedicated chemical parks.

MSME

The budget recognises that MSMEs are often trapped in low scale and low productivity despite being central to growth, employment and supply chains. As many MSMEs fail due to lack of risk capital and managerial capacity, the SME Growth Fund will provide equity and quasi-equity support. The TReDS platform will help garner liquidity support to loosen working capital constraints, while para-professionals trained by ICAI, ICSI and ICMAI, and the Corporate Mitras, will provide professional support to MSMEs at affordable costs.

Capex and Infrastructure

The government has once again reaffirmed its commitment to infrastructure development by enhancing capital expenditure to ₹12.2 lakh crore and effective capital expenditure² to ₹17.1 lakh crore. Despite progressive fiscal consolidation, there has been a six-times rise in capital expenditure in the last ten years, confirming a decisive shift toward asset creation as part of the core growth strategy. Alongside existing initiatives such as InVITs, REITs, NIIF and NABFID, there will be an Infrastructure Risk Guarantee Fund (IRGF) to provide a partial credit guarantee to lenders.

The budget recognises cities, especially Tier II and Tier III, as engines of growth, innovation and opportunity, and a transformative concept of City Economic Regions (CERs) has been evolved with an allocation of ₹5,000 crore per CER for the next five years. It also emphasises environmentally sustainable freight and passenger transportation systems for logistics efficiency and regional connectivity, including freight corridors, coastal shipping, national waterways, high-speed lanes and seaplanes.

Rationalisation of Subsidies

The trend in expenditure on the three major subsidies (food, fertiliser and petroleum) shows a gradual recalibration of expenditure priorities. Food subsidy has stabilised at around 4–4.5 per cent of total expenditure; however, a sharp moderation is visible in the fertiliser subsidy for FY 2026–27, mainly due to the normalisation of global commodity prices rather than the withdrawal of support³. Petroleum subsidy remains marginal throughout. The overall pattern suggests that subsidy rationalisation is creating fiscal space for capital expenditure without compromising welfare commitments.

Financial Sector Reforms

The budget proposes to take financial sector reforms forward by setting up a High-Level Committee on Banking for Viksit Bharat and restructuring Power Finance Corporation and Rural Electrification Corporation. India has evolved a robust banking system where banks have strong balance sheets, high profitability and near universal coverage; the committee will review the banking sector to align it further with the vision of Viksit Bharat. The budget also mentions corporate bond market reforms, incentives for municipal bonds and a review of foreign investment rules.

Macroeconomic Framework in the Budget

The budget has a nuanced macroeconomic framework visible in its approach toward public investment-led growth, fiscal consolidation, supply-side reforms, and thrust on the role of the private sector. The target of around 7 per cent growth is quite plausible against the underlying macroeconomic fundamentals.

Fiscal Framework in the Budget

Like several past budgets, this budget shows the continued commitment of the government to fiscal prudence along with growth-accelerating expenditure. The budget proposes to prune the fiscal deficit to 4.3 per cent of GDP in FY 2026–27 and targets a reduction in the debt-to-GDP ratio to 55.6 per cent without compressing expenditure in productive sectors. Primary deficit is projected to decline to 0.7 per cent of GDP, while revenue deficit will remain at 1.5 per cent of GDP.

A stable revenue deficit signals stability in the gap between revenue receipts and revenue expenditure. A lower revenue deficit means a larger share of government borrowings is directed toward capital expenditure rather than current consumption. A lower primary deficit reflects a move towards greater long-term debt sustainability, wherein the government reduces its reliance on borrowing beyond the cost of debt servicing⁴. These indicators suggest that the fiscal behaviour of the government is well aligned with the FRBM Act, which mandates fiscal prudence and sustainable debt management.

Service Sector, Human Capital and Employment

The budget realistically recognises that manufacturing alone cannot address the employment challenge for India’s growing workforce, and that the services sector has a comparative advantage in human capital-intensive activities. There is renewed emphasis on services like healthcare, the care economy, tourism, AVGC, design, education, and sports. Planned initiatives include university townships, one girls’ hostel in each district, and upgraded research infrastructure to boost participation and productivity. Rather than short-term employment schemes, the budget adopts a capability-building approach, treating skills, credentials and institutions as drivers of labour market outcomes.

Agriculture Sector

The budget looks forward to a productivity-oriented empowerment of diversified areas within agriculture, comprising fisheries, livestock, high-value crops, and value chains. Greater focus is visible on high-value crops such as coconut, sandalwood, cocoa and cashew in coastal areas, and almonds, walnuts and pine nuts in hilly areas. An AI tool-based system named Bharat-VISTAAR for advisory support to farmers, and SHE-Marts to support rural women-led enterprises, will be launched.

Tax Proposals

The budget maintains a status quo in the rate and slab structure of income tax, and base corporate tax rates remain unchanged. The tax proposals are mainly focused on stability, which provides certainty to taxpayers, investors and businesses, with emphasis on administrative simplification, TCS rationalisation, and compliance reforms. A significant change has been made in the Securities Transaction Tax (STT) to rationalise taxation of high-frequency and speculative trading segments — a modest change that will enhance revenue from capital market taxation without any change in capital gains tax.

Indirect tax proposals focus mainly on rationalisation of customs duties and simplification. The budget extends several basic customs duty exemptions and relaxations to support domestic manufacturing in sectors like energy, aviation, critical minerals, and defence, and to boost export-oriented sectors like marine, leather textiles, and e-commerce. Relaxations on personal use goods, certain lifesaving medicines and rare disease treatments will improve ease of living. Decriminalisation of minor tax offences and expansion of faceless, technology-driven assessments will further strengthen administrative efficiency.

Conclusion

The Budget for the fiscal year 2026–27 shows policy continuation and a further investment-centric approach. Sustained enhanced capital expenditure is its main strength, and the persistence of high levels of effective capital expenditure shows that public investment will be the catalyst of economic growth. The budget unequivocally accepts the role of the private sector in development and proposes a facilitating framework for it to operate. Declining fiscal and primary deficit targets, along with a stabilising debt-GDP ratio, will provide confidence to investors in the economy.

The government is steering the Indian economy toward a model of development that is inclusive and sustainable. With targeted capability creation, an improved fiscal framework, and investment in human capital, the budget will prove to be a catalyst for rapid economic growth.