Why in news?

• The Union Budget for 2026–27, to be presented by Nirmala Sitharaman, will outline three core aspects:
  • the government’s expectations for economic growth and planned spending across schemes and departments;
  • projected revenues from tax and non-tax sources; and
  • the level of borrowing required to bridge the gap between income and expenditure, known as the fiscal deficit.
• While the Budget formally marks a fresh financial year, it is rarely a blank-slate exercise.
• In practice, fiscal realities and policy commitments from previous years significantly limit the scope for major shifts, leaving only constrained room for fundamental change.

What’s in Today’s Article?

• Why a New Budget Has Limited Room for Change?
• What Current-Year Data Signals: Three Key Macro Concerns?

Why a New Budget Has Limited Room for Change?

• A Union Budget is constrained by committed expenditures and policy continuity.
• Salaries, pensions, and many subsidies cannot be easily altered year to year, nor can tax rates be frequently changed.
• Crucially, the Finance Minister’s choices are shaped by the state of government finances in the ongoing year.
• Shocks or stresses—such as exports hit by US tariffs—often carry over, setting priorities for the next Budget.
• As a result, reviewing the year just ended offers key clues to what the Budget can realistically address.

What Current-Year Data Signals: Three Key Macro Concerns

• Current-year economic data point to several issues, but at the macroeconomic level, three broad concerns stand out as especially relevant for the upcoming Budget.

1. Weak Nominal GDP Growth: A Key Budget Worry

• While India’s real GDP growth often makes headlines, it is nominal GDP—the total value of goods and services at current prices—that matters most for Budget-making.
• Nominal GDP is the base on which tax revenues, spending plans, and borrowing needs are calculated.
• The Budget Arithmetic Problem
  • If nominal GDP grows slower than expected, government revenues fall short.
  • For example, lower-than-anticipated nominal growth means less tax collection, forcing the government to either:
    • Borrow more, which can crowd out private borrowers and push up interest rates, or
    • Cut spending, potentially reducing funds for R&D, infrastructure, or welfare.
• A Sustained Slowdown
• India’s nominal GDP growth has been decelerating for years. For the current year, it is expected to grow by just 8%, markedly lower than the levels seen over the past two decades.
• This is below the 10.1% growth assumed in last year’s Budget and reflects a recent secular slowdown.
• Implications for Budget 2026
  • The First Advance Estimates now peg nominal GDP growth at 8%, tightening fiscal space.
  • The foremost challenge for the Finance Minister is to devise a strategy to lift nominal GDP growth in the coming year to stabilise revenues and avoid difficult trade-offs between borrowing and spending.

1. Weak Tax Buoyancy: Revenues Falling Short of Expectations

• Tax buoyancy measures how tax revenues respond to economic growth.
• A buoyancy of 1 means tax collections rise in line with GDP. If GDP grows 10%, taxes grow 10%. Budgets often assume buoyancy above 1 to fund spending.
• If nominal GDP grows less than expected and tax buoyancy is lower, revenue shortfalls multiply.
• For instance, slower GDP growth combined with a buoyancy of 0.5 can slash expected additional revenues sharply.
• What’s Happening This Year?
  • Actual tax collections are lagging Budget assumptions across categories.
  • Year-to-date growth in taxes trails the government’s targets—and is even below the weak nominal GDP growth rate (around 8%).
  • Data show that while the Budget assumed tax buoyancy of 1.1, the actual buoyancy is closer to 0.6.
  • In other words, tax revenues are growing at barely half the pace anticipated relative to GDP.
• Implications for the Budget
  • Weak tax buoyancy tightens fiscal space.
  • With revenues underperforming, the government faces tougher choices between higher borrowing and spending restraint, complicating Budget 2026 planning.

1. Weak Private Corporate Investment: A Persistent Growth Challenge

• A central policy objective of the government has been to expand the role of the private sector under the idea of “Minimum Government”.
• Since 2019, this has translated into sharp corporate tax cuts, higher public capital expenditure, and targeted incentives like the Production Linked Incentive (PLI) scheme to lower costs and crowd in private investment.
• When investment did not respond as expected, the government shifted focus to boosting demand—raising income tax exemptions and cutting GST rates—to improve sales prospects and create a stronger business case for private investment.
• Investment Still Below Pre-Pandemic Levels
  • Despite these measures and strong headline GDP growth, data show that private corporate investment remains below pre-pandemic (2019) levels.
  • Firms are hesitant to invest widely, largely because sales growth has not been strong enough to justify fresh capacity creation.
  • Adding to concerns, foreign investors have also reduced exposure to India in recent periods.
  • This has put pressure on the rupee, creating economic and political challenges for Nirmala Sitharaman.
• The Budget Dilemma
  • The key question for the upcoming Budget is how to revive private investment—what additional incentives or reforms can restore confidence, lift demand, and persuade both domestic and global investors to commit capital more decisively.