This year’s budget was eagerly awaited for two reasons considering that not much was expected on the taxation front as the major reforms were implemented last year. The first is the policy or reforms push, given that while the Indian economy has done very well, the external environment continued to be uncertain. In fact, as pointed out by the Economic Survey, this was a paradox in the system with a very good economy coexisting with a rather volatile rupee. The second is the direction of the fiscal deficit which is basically the arithmetic of the budget which would flow from the various reforms or policy measures.
Starting backwards with the numbers, the budget shows that the dominant ideology driving the content was prudence. This comes out from the fact that the government is targeting a fiscal deficit ratio of 4.3 per cent this year, and hence we seem to be on the path of targeting the debt-to-GDP ratio of 50 per cent in the near-term though would be at 55.6 per cent this year.
The fiscal deficit involves a gross borrowing programme of Rs 17.2 trillion and a net borrowing of Rs 11.7 trillion. It would need to be seen how the market reacts because the gross borrowing programme is higher than last year, though the net claim on the market is the same. This has been necessitated by the higher redemptions falling this year. As was seen for FY26 the state borrowings also matter when it comes to bond yields.
Further, the growth in nominal GDP has been assumed at 10 per cent, which appears realistic this time as the low base effect of FY26 will translate into a higher number this year. Assuming the economic survey growth of 6.8-7.2 per cent in real GDP as the underlying, inflation will be at 2.9-3.2 per cent in terms of the GDP deflator, which may tend to indicate average CPI inflation of closer to 4 per cent plus. While these numbers will change once the new base gets known, there may not be too much room for further rate cuts in this scenario. Also given the larger borrowing programme, a wait-and-watch approach may be preferred by the monetary policy committee (MPC).
The social welfare programmes have been well targeted as can be seen from the allocations for farmers and employment, which are the two big allocations for the government. Alongside, the government appears steadfast in its commitment to capex with an outlay of Rs 12.2 trillion. While there are signs of private sector capex picking up, so far the government has been the main driver and this is where the allocations across segments matter.
The financial sector could be seeing some major reforms post the setting up of a committee that will review the system and offer recommendations. The permission to have market makers in the bond market would augur well and one can expect activity to increase.
On the policy front the focus has been on agriculture, industry, MSMEs and exports, with several interlinkages being leveraged by the budget. The new areas which have been included in specific allocations are rare earths, freight corridors, waterways and data centres. This would help in making more self-sufficient in the long run for rare earths, while the advantage of supporting data centres will enable India to become an effective player in the area global capability centres.
The budget hence delivers well on prudence and focuses more on the future thrust areas thus bringing in not just novelty but pragmatism.
