Where does the Budget stand as far as its fiscal math is concerned? This question is best addressed by examining three factors: the exogenous variable of nominal GDP growth, trends in tax buoyancy and the quality of spending rather than just its quantitative impact.
The most important assumption is that inflation, more in terms of how it affects the GDP deflator than household budgets, will see some increase. It was a mere 0.6 percentage point in 2025-26 and is expected to be in the range of 2.8%-3.2% in 2026-27 if the Economic Survey’s real growth projection of 6.8%-7.2% and the Budget’s nominal growth projection of 10% are to be read together. This is not an unreasonable assumption to make given how things stand right now. However, nominal growth’s importance will be extremely critical for the budget, not just this year but even in the medium term given the fact that debt trajectory and not one-off fiscal deficits will now be the critical marker of fiscal prudence.
This was best explained in a note issued by JP Morgan Chief India Economist Sajjid Chinoy on January 28. “If nominal GDP growth averages 10% over the next 5 years, the Centre will have to reduce its deficit from 4.4% of GDP in FY26 to 3.6% of GDP in FY31 to bring central debt down to about 50% of GDP. A 0.8% of GDP consolidation across five years is not a particularly onerous task. Furthermore, the primary deficit (what the Centre controls) will have to come down by half of that (0.4% of GDP) because Interest Payments/GDP will itself fall over time…What if nominal GDP growth settles at 9%, which is very plausible? The central fiscal deficit would then need to be reduced all the way to 3.0% of GDP, necessitating a large 1.4% of GDP of consolidation…The primary deficit will need to do most of the consolidation, reducing by 1% of GDP over the next five years,” it says.
To be fair to the government, there is little it can do to influence or predict nominal growth up to 2030-31 and it will have to take things as they come. What can be said is that the government has raised the fiscal prudence bar for itself by adopting debt rather than deficit as the guiding anchor of fiscal policy in the current environment.
Let us now come to the question of tax buoyancy. It is the change in tax revenue per unit growth in GDP. A higher tax buoyancy means the budgetary space increases for similar levels of growth and deficits and a fall in it entails a fiscal squeeze. The budget is extremely conservative on this count and assumes an overall tax buoyancy of just 0.8 between 2025-26 Revised Estimates (RE) and 2026-27 Budget Estimates (BE) numbers.
This, in a way, reflects the impact of the large reductions in income tax and GST rates last year. What has followed, on expected lines, is a minor drop in the tax-GDP ratio as seen in the Union Budget. It was 11.5% in 2023-24 and 2024-25, fell to 11.4% in the 2025-26 RE data and is expected to come down to 11.2% in 2026-27.
To be sure, tax buoyancy assumptions are different for direct and indirect taxes. “On the fiscal math for FY27, direct taxes are likely to grow faster than nominal GDP growth (tax buoyancy of more than 1). Indirect taxes are expected to grow much slower (tax buoyancy of 0.3), led by the recent cut in GST tax rates,” HSBC Chief India Economist Pranjul Bhandari said in a note issued Sunday.
This can also be seen in the tax-GDP ratio for direct and indirect taxes. It is 6.9% and 4.3% for direct and indirect taxes in 2026-27 BE numbers, the highest and lowest since 2017-18 which is where the Budget at a Glance compares them from. Seen another way, this also rules out any major tax relief in the near-term.
What about the question of fiscal balance as far as the quality of spending is concerned? Almost one-third (32% to be precise) of the total budgetary spending is now contributing to effective capex which has now reached 4.4% of GDP. In terms of share in total budgetary spending, this share was less than 20% until 2020-21. Even the amount explicitly earmarked as capital spending, if one were to exclude grants-in-aid funds, has more than doubled from 1.5% to 3.1% of GDP between 2017-18 and 2026-27. The increase in capital spending has been made possible by a large reduction in revenue spending excluding interest payments in the last few years. This has fallen from 10.2% of GDP in 2021-22 to 6.9% in 2026-27 BE numbers.
A commitment to fiscal prudence without letting go of its priority on capital spending has become the defining feature of the current government’s budgets in the post-pandemic period. That this has continued despite a fall in tax buoyancy only underscores this commitment.
Whether or not this strategy brings the desired rewards will now depend more on external variables via channels such as China’s excess capacity’s impact on global inflation (and hence nominal GDP growth) and the Economic Survey’s admission that fiscal prudence is now only the necessary and not the sufficient condition for unlocking the rewards the government earlier though would follow automatically. Be that as it may, the budget scores well as far as fiscal consistency is concerned.
