Budget 2026-27 comes at an inflection point. India’s choices are no longer about cyclical tweaks. They are about basic architecture. We have been emboldened by robust real GDP growth, with a stable macro framework. This is notwithstanding external fragility and multiple institutional rigidities. The goals cannot be sequenced. They must move in tandem. This is orchestrated in this budget. It attempts to act with audacity, panache and cautious optimism.
Three movements define it.
First, non-inflationary growth. Old macroeconomics treats this as a trade-off, as illustrated by Okun’s law. India’s recent experience counters this. Growth for FY27 is expected to be around 7%; even as inflation has eased meaningfully. In Olivier Blanchard’s latest work, Fiscal Policy under Low Interest Rateshe calls it the “divine coincidence”. It rests on higher total factor productivity, supply-side repair, logistics improvements, and fiscal discipline. Food disinflation and supply corrections have led to moderation in headline CPI. This boosts purchasing power but also compresses nominal revenues. That is the asymmetry in today’s macro mix. Good for households. Harder for debt arithmetic.
Usually, there is symmetry between inflation and the GDP deflator. However, they may diverge when prices move differently for what a country produces versus what its households consume. Export booms can inflate the deflator while keeping the CPI low, as demonstrated by Norway in 2022 and Japan in the 2000s. The recent success of India’s trade agreements has opened up this possibility for India.
The budget sustains fiscal consolidation with clarity rather than compromise. A deficit of 4.3% of GDP and a glide path towards a 50±1% debt ratio by 2030-31 signals intent, not accommodation. Capital expenditure rising to 4.4% of GDP strengthens the growth-infrastructure-fiscal credibility loop. More striking is the willingness to reconsider the state’s ownership footprint, including lowering government stakes below 51% in public sector banks and enterprises. This is not optics, but a statement on the limits of public balance sheets. Intergenerational equity is explicit — debt is tomorrow’s tax. Or, as the old moral hazard runs: May thou be blessed, for thou shall inherit my debt.
Inflation measurement will soon matter even more. A new CPI series is expected on February 12, with the new GDP series scheduled for February 27. That will change both perception and policy response. Monetary-fiscal coordination will require sharper calibration.
The second movement is external stability in a disorderly world. Exchange rate stability is important. However, reserves are robust and should not be frittered in the will-o’-the-wisp of achieving a preferred exchange rate. The current account remains manageable, well below the FRBM’s 2.3% sustainability threshold, with services exports anchoring resilience. Yet capital flows are subdued: Gross FDI is strong, but net inflows have softened on the back of foreign capital exits.
This budget signals to global investors. Customs rationalization improves predictability. Selective duty exemptions support the energy transition, from lithium-ion cell manufacturing to battery storage systems. Export regimes for marine and leather products are eased. Trade is being repositioned as an engine of growth, not a vulnerability.
Strategic manufacturing is being anchored deeper into global value chains. Biopharma SHAKTI, semiconductor mission 2.0, rare earth corridors, textile parks, and a ₹10,000-crore MSME growth are sagacious steps toward a resilient future. High-speed rail corridors, dedicated freight links, national waterways, and city economic regions are not vanity projects. They are spatial strategies to broaden growth beyond metros and reduce congestion costs that silently tax competitiveness.
But incentives alone will not encourage states to build the infrastructure required. The 16th Finance Commission’s decision to eliminate revenue deficit grants is pivotal. Instead, the special assistance to states for capital investment (SASCI) scheme will help meet state capital expenditure needs more precisely. Its action taken report and press note are the only real bridges in Centre-state relations. Standards. Procedures. Regulatory coherence. Without a coherent policy across states, India risks regulatory arbitrage and erosion of national cohesion.
The third movement is institutional. And it remains obstinate. India’s bureaucracy has talent and innovation. It has, however, become excessively risk averse. That caution has protected fiscal discipline. However, if we seek to become an entrepreneurial class, far more impactful decisions must be taken by the plethora of regulatory agencies and the judiciary. Inaction becomes safe. Growth pays the price.
A new Administrative Reforms Commission is, therefore, the need of the hour. What is required is a framework that enables bona fide decision-making while enforcing accountability. The ease with which malfeasance is alleged has become prima facie evidence against decision-makers, discouraging risk-taking and slowing action. Yet such decisions are integral to triggering investment. Without this distinction, even the best policies will stall at implementation. Following through with bureaucratic reform will speed up the reform process and ultimately, India’s economic growth.
Economic growth remains inseparable from the development of human capital, skilling and employability. The World Bank president and the finance minister last week established an audacious country partnership framework, providing $8-10 billion per annum for five years. This emphasizes apprenticeship-led job creation. Its imprint was evident in the budget — in the university townships, creator labs in schools and colleges, AI-integrated skilling, targeted support for the vulnerable. One message is clear: We must move from jobless growth to job-led growth.
Harnessing multilateral finance is the most efficient way to meet India’s financing needs, given the long tenures and AAA ratings of these institutions. Beyond the World Bank, India should replicate this approach with other multilateral development banks and fully utilize the headroom they offer.
Capital expenditure, carbon capture, transport corridors, and energy transition are ultimately bets on scale, coordination, and credibility. As Lee Kuan Yew warned, the world is a process. Stand still, and you decline. Adapt, and you endure. This budget renews India’s growth trajectory. Sustaining it will depend on three tests: macro credibility, capital quality, and institutional courage. Now comes the execution.
NK Singh is president, Institute of Economic Growth, and chairman, 15th Finance Commission. The views expressed are personal
