Since the pandemic surge in government expenditure, successive budgets over the last five years have been carefully tapering government expenditure. Total expenditure, as a percentage of GDP, fell from 17.73 in the peak pandemic year of 2020-21 to 14.19 in 2024-25, before settling at 13.9 in the current financial year (2025-26, Revised Estimate). This trend will continue into the next financial year (2026-27), as expenditure is projected to decline further to 13.61.
The policy choice the government made in the immediate post-pandemic era was to stimulate the economy through enhanced capital expenditure. Inevitably, therefore, the ax has fallen on revenue expenditure, through which the government of India’s social sector spending takes place. Revenue expenditure dropped from 11.83% of GDP in FY23 to 10.83% in the current financial year (FY26), and is projected to decline further in FY27 to 10.5%. These cuts have ensured that allocations in most flagship schemes have either seen dramatic cuts or broadly stayed stagnant. The headline number in this budget: For FY26, centrally sponsored schemes saw cuts amounting to 0.34% of GDP in the Revised Estimate over the Budget Estimate of 1.52% of GDP. The most dramatic cut was in the Jal Jeevan Mission that had a budgeted expenditure of ₹67,000 crore, which was revised down to ₹17,000 crore for this fiscal year. Another dramatic cut was in the Pradhan Mantri Awas Yojana (urban), which saw a cut from a Budget Estimate of ₹23,294 crore to a Revised Estimate of ₹7,800 crores.
These cuts and the consistent under-prioritisation of social sectors are symptomatic of a larger structural tension that has plagued India’s economic policy-making, one that global turmoil has made sharper. The now widely acknowledged reality about the Indian economy is its structural inability to generate labour-intensive growth. Successive policy missteps — demonetisation, the Covid-19 period lockdown, and a badly designed GST — deepened this structural failure.
Since the pandemic, the government’s response to this has been to stimulate the economy first via the push to capital expenditure, in the hope that this would crowd in private investment and generate jobs, and when this proved insufficient, to boost consumption via income tax cuts and GST rate rationalization.
This raft of support has helped steady the ship — India has now settled at a modest 6-7% growth rate. But it has done little to address the structural constraints within the economy — lagging private sector investment, which the Economic Survey calls out, is the most important illustration of the limits of the current approach. The tax cuts may have imparted some cyclical stimulus to the economy, but have simultaneously limited the government’s ability to raise its tax-GDP ratio; they haven’t delivered on unleashing the animal spirits either. Thus, the status quo is entrenched. From the perspective of the budget math, the failure to grow the economy has meant that it continues to struggle to find the fiscal space needed to finance its basic functions and therefore has no space for articulating a vision for the economy.
Yet, even within these constraints, a lot could have been achieved. The budget speech gave an appropriate policy nod to the challenge of jobs. The “education to employment and enterprise” standing committee in the services sector, the emphasis on professionals health, and the care economy, and the push to champion micro, small and medium enterprises (MSMEs) with corporate mitrasand women’s hostels in every district were reassuring announcements of a policy pivot in the direction of addressing India’s lingering jobs challenge.
But if the vision indeed is that India will address its structural demand problem through deeper investments in the services sector and skilling its people, the budget allocations leave a lot to be desired.
Allocations for the ministry of education are nearly stagnant — from ₹121,949 crore Revised Estimate (FY26) to ₹139,289 crore Budget Estimate (FY27). Despite the promise of one girl’s hostel in every district, the department of higher education has seen a small jump from the Revised Estimate (FY26) of ₹Rs 51,382 crore ₹Rs 55,727 crore. A service-led employment strategy will only work if long-term investments are made in human capital. The budget allocations offer little comfort that these grand announcements will result in any serious policy shift.
Finally, there is the question of state finances. Since the 2024 election, much of the welfare thrust has come through cash transfers on the eve of elections. This has allowed the Union government to demand that state finances be scrutinized and, indeed, lay the blame for handout politics on the states while simultaneously avoiding scrutiny over its own unfair treatment of state finances. For one, the Union budget has consistently short-changed states when it comes to fulfilling the Finance Commission’s mandate of devolution to states. Consistent with the refusal to meet the finance commission mandate of vertical devolution of 41%, for FY27, the state share in gross tax revenue is projected to be 34.66%. Beyond the headline, there are two other important things to pay attention to in the fine print.
First, the Finance Commission grants are projected to fall by 15% over last year’s allocations. Careful scrutiny of the 16th Finance Commission report will be needed to understand the reasons for this decline in allocations. Second, the MGNREGA transition to G RAM G — don’t get carried away with the claim on the central allocation of ₹₹95,692.31 crore. The states will now bear 40% of the total expenditure, which is estimated to come to another ₹Rs 55,590 crore. The squeeze on state finances is going to be a major fault line going forward.
In sum, finance minister Nirmala Sitharaman’s 2026 Budget is best judged for its sober admission of the limits of what it can achieve given the structural constraints of the Indian economy. Its failure to prioritize social spending will deepen the challenge for the Indian economy rather than enable it to be genuinely atmanirbhar (self-reliant) against the growing turmoil around the world.
Yamini Aiyar is senior visiting fellow, Brown University. The views expressed are personal
