UPSC Syllabus: Gs Paper 3- Indian economy
Introduction
Union Budget 2026–27 is presented during a rare goldilocks phase of high growth and low inflation. India has become the fourth-largest economy and remains one of the fastest-growing. However, global geopolitical tensions and tariff conflicts pose risks to long-term growth. The Budget tries to balance optimism with realism. It focuses on continuity, long-term vision, and capital-led growth while avoiding short-term stimulus-driven policies.
India’s Fiscal Status and Strategy
- Macroeconomic context and fiscal approach: The Budget is framed during a rare phase of strong growth and price stability. It recognises underlying risks that can weaken future growth if not managed carefully.
- Capex-led growth continuity: Capital expenditure has been raised to ₹12.2 lakh crore for FY27 from ₹11.2 lakh crore in the current year. Public infrastructure spending continues to be the main engine of growth.
- Fiscal deficit and consolidation path: The fiscal deficit target is set at 4.3% of GDP for 2026–27. This signals continued commitment to fiscal discipline while supporting growth through capital spending.
- Debt and borrowing profile: Fiscal numbers indicate a medium-term path toward a debt-to-GDP ratio of 50%, though it stands at 55.6% in the current year. Gross borrowing is ₹17.2 trillion, while net borrowing is ₹11.7 trillion.
- Borrowing pressure and interest rate limits: Although net market borrowing remains unchanged, higher gross borrowing reduces space for further rate cuts. Large borrowing requirements can keep interest rates firm.
- Growth and inflation assumptions: Nominal GDP growth is assumed to be above 10%, which appears realistic. Real GDP growth is expected at 6.8–7.2%, with a GDP deflator inflation of 2.9–3.2%.
- Inflation outlook risks: These assumptions suggest CPI inflation closer to 4% or higher in the coming year. Inflation outcomes may change once the new GDP series is introduced.
Industrial and Manufacturing Push
- Early focus on manufacturing: The Budget places manufacturing at the centre of its strategy from the beginning. This marks a clear shift from earlier Budgets.
- Support across sectors and firm sizes: Industrial growth is targeted across emerging sectors, legacy industries, and MSMEs, including khadi and handicrafts. This widens the base of industrial expansion.
- Strategic and frontier sectors: Support is expanded for seven sectors such as semiconductors, electronics components, biopharma, chemicals, capital goods, and textiles. The intent is to move beyond incentive-only schemes.
- Electronics and semiconductor initiatives: The Electronics Component Manufacturing Scheme outlay is raised to ₹40,000 crore. India Semiconductor Mission 2.0 aims to deepen domestic chip production and reduce supply chain risks.
- Logistics and container manufacturing: ₹10,000 crore is allocated for a new container manufacturing scheme. Investment in freight corridors and transport strengthens export competitiveness.
- Response to global trade disruptions: The Budget addresses disruptions from the China–US tariff conflict, which has restricted access to critical minerals. These minerals are vital for electronics, defence, EVs, and renewable energy.
Support to Exports and MSMEs
- Relief for export-oriented sectors: Targeted measures are provided for export sectors affected by higher U.S. duties. Textiles, leather, and seafood receive specific attention.
- Shift in MSME financing approach: The focus moves toward structural strengthening of MSME finance rather than short-term credit support.
- SME Growth Fund: A ₹10,000 crore SME Growth Fund is proposed to address equity gaps for scalable firms. It is expected to complement bank lending.
Key Surprises and Policy Contradictions
- Disinvestment revenue expectations: Despite weak execution, the Budget continues to expect disinvestment receipts. Last year’s target was ₹47,000 crore, but only ₹8,768 crore was realised.
- Extended tax concessions for cloud services: Global cloud service providers using Indian data centres are offered zero tax until 2047. A 22-year exemption is unusually long.
- Employment expectations in services: Higher employment generation is expected from the services sector. This contradicts low employment elasticity and rising job displacement due to AI.
- Data centres and power mismatch: The push for more data centres is not matched by a clear increase in power generation. Data centres have high electricity demand.
- Silence on rupee volatility: Despite recognition of a volatile rupee alongside strong growth, the Budget does not address this issue.
Gaps and Structural Challenges
- Need for a comprehensive industrial policy: Manufacturing initiatives lack integration into a broader industrial policy. Without this, measures risk remaining fragmented.
- Weak focus on domestic demand: Sustained industrial growth requires strong domestic demand. The Budget offers limited discussion on this aspect.
- Capex execution shortfall: Effective capital expenditure for 2025–26 was budgeted at ₹15.48 lakh crore but actual spending was ₹14.03 lakh crore. This weakens demand multipliers.
- Dependence on volatile external demand: Export-led growth remains vulnerable to global uncertainty. Domestic employment and income growth are critical to offset this risk.
- Inflation and income challenge: Price pressures can weaken purchasing power. This may emerge as the weakest link for manufacturing expansion.
Conclusion
The Budget presents a strong industrial vision anchored in fiscal prudence and capital-led growth. However, gaps in demand support, execution, and policy coherence remain. Sustaining growth in 2026–27 will require managing short-term pressures while building long-term industrial strength. This demands speed and endurance at the same time.
Question for practice:
Discuss how Union Budget 2026–27 seeks to balance fiscal prudence with an industrial and manufacturing-led growth strategy, and highlight the key challenges that may affect its effectiveness.
Source: The Hindu
