Why the Budget Must Focus on the Next Mile

The upcoming Union Budget will be a landmark one for Finance Minister Nirmala Sitharaman, who will present her ninth consecutive Budget. As we await the details of the most comprehensive annual economic statement and fiscal math, it is useful to consider the global context and ground realities that will guide this exercise. 

In a world navigating choppy waters, both politically and economically, the Indian economy resembles a ship that is broadly on course, guided by the steady hand of an experienced captain. However, with expectations of stronger headwinds in the year ahead, it is important to remain mindful of the many challenges along the voyage towards Viksit Bharat @2047.

While the vision of Viksit Bharat is both aspirational and achievable, it is important that the Budget places greater emphasis on short-term key performance indicators, including fiscal ones. 

This would be consistent with the constitutional requirements of the Annual Financial Statement (Article 112) and the provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, including the Medium-Term Fiscal Policy statement. It is important that the country continues to achieve robust economic growth in line with 7.4% in 2025-26, alongside benign inflation within the target band of 4% ± 2%. With broad consensus supporting reasonable confidence in the achievement of these two macro targets, the Budget is expected to focus—indeed, should focus—on improving the quality of economic growth in pursuit of the long-term vision.

First, economic growth must be achieved alongside sustainable fiscal deficits. While strong fiscal impetus was entirely justified during the COVID period, the persistence of a high fiscal deficit, budgeted at 4.4% in 2025-26 and articulated through a long glide path, remains significantly above the FRBM norm of 3% and warrants a faster pace of consolidation. This assumes added importance given that, although fiscal deficit targets have been broadly met in recent years, the explicit numerical target itself has been significantly above the statutory mandate, placing a greater onus on policy credibility and discipline. 

The earlier experience of stimulus following the 2008 global financial crisis, and the delayed return to fiscal prudence thereafter, is well known. Without reducing the fiscal deficit meaningfully, the share of interest payments in central government expenditure—budgeted at about 25%—cannot be brought down. 

To improve the quality of economic growth, it is essential that private consumption and investment reclaim their rightful share in the growth narrative, with the government focusing on creating a robust enabling environment. In this context, suggestions that the government may shift the fiscal performance indicator from annual gross fiscal deficit to the debt-to-GDP ratio appear disingenuous, since the former remains more transparent and operationally relevant. Annual fiscal deficit, after all, represents the change in the debt-to-GDP ratio, adjusted for minor fiscal transactions.

Second, sectoral growth rates are often as important as the aggregate growth number, particularly from the standpoint of deploying fiscal levers effectively. It is expected that the finance minister will emphasise investments in strategic sectors such as semiconductors, critical minerals, and energy transition, while continuing to prioritise agriculture, especially value-added segments, manufacturing, MSMEs and sectors linked to merchandise exports. India’s services sector, including services export, has been growing faster than the rest of the economy, and measures to sustain this momentum are expected.

In view of the challenges confronting merchandise exports, triggered in particular by US tariffs and China’s export controls, the comprehensive customs reform promised by the government is keenly awaited. It is hoped that this exercise will address the entire regulatory ecosystem affecting the smooth flow of goods across international borders, rather than focusing narrowly on provisions of the Customs Act. The recent experience of the adverse impact of well-intentioned Quality Control Orders on Indian exports, which necessitated a prompt rollback of rapidly expanding non-tariff barriers, should inform these reforms. 

At the same time, the objective must be to better leverage the free trade agreements already concluded, such as those with the UK, Oman, and New Zealand, as well as those under negotiation, including with the European Union. The broader aim should be to equip Indian exporters to navigate non-tariff barriers in destination markets, while also ensuring a smoother import process domestically.

Only when both these legs are strengthened can India secure a larger share of global value chains. These customs reforms are expected to be the lynchpin of taxation-side reforms, especially as GST reform 2.0 and the new Income Tax Code have already been announced mid-year.

Third, the Budget will also reflect the tax devolution and fiscal transfer framework recommended by the Sixteenth Finance Commission, chaired by Dr Arvind Panagariya. The Commission submitted its recommendations to President Droupadi Murmu on November 17, 2025, and, as per established practice, the government is expected to place the report before Parliament ahead of the Union Budget. The Commission’s recommendations, and their implications for the fiscal health of state governments, are likely to feature prominently in post-Budget discussions, particularly given that states’ flexibility in raising their own revenues has been significantly constrained in the post-GST regime.

Fourth, the Budget is expected to place considerable emphasis on employment-related issues. With the announcement of four Labour Codes replacing 29 existing labour laws that recognise gig workers’ rights, concern over the potential negative impact of GenAI on employment and the risk of jobless growth, measures to support job creation are likely. These may focus on promoting labour-intensive exports and strengthening services-sector employment, including in the rapidly expanding Global Capability Centre ecosystem.

Finally, another key dimension of economic growth likely to get attention is the regional one, shaped not only by the electoral calendar. With state elections due in West Bengal and Assam, following a decisive victory in Bihar, a greater focus on eastern India would be advisable even from a broader economic perspective. Sustainable national growth must incorporate regional balance.

The central government, with its larger fiscal capacity and stronger levers, is well-positioned to support the growth momentum emerging in these states. The Budget, which will set out the framework for federal fiscal transfers over the next five-year period, will therefore be closely watched by political observers and economists alike.

In a year of global flux, the Budget’s success will hinge on its ability to combine policy credibility with growth quality, not just growth momentum.

(Zuhaib Bangroo at ICPP has contributed to this piece)

Vijay Singh Chauhan was Director, Budget in one of his earlier assignments.