Budget 2026-27 Fails to Provide Coherent Economic Narrative: Rathin Roy's Analysis
Economist Rathin Roy has delivered a pointed critique of India's Union Budget for 2026-27, arguing that while it demonstrates fiscal prudence and attempts to reform tax administration, it fundamentally lacks the coherence needed to tackle the country's real economic challenges. The budget, according to Roy, leaves unanswered the crucial question of why prosperity remains muted across the economy despite satisfactory macroeconomic indicators.
The Structural Fiscal Constraint and Policy Optics
The government of India has been shrinking in fiscal terms, with its total expenditure-to-GDP ratio showing only a marginal increase from 12.8% in 2016-17 to a projected 13.6% in 2026-27. This 0.8-percentage-point rise precisely matches the increase in the fiscal deficit over the same period, a trend masked by the COVID-19 expenditure spike and subsequent correction. Roy emphasizes that fiscal prudence has become a necessity rather than an unconstrained policy choice, driven by a lack of tax buoyancy despite reasonable growth, failed disinvestment efforts, and an over-reliance on RBI dividends for non-tax revenue.
The economist dismisses the budget's move to target public debt rather than the annual fiscal deficit as largely cosmetic optics. He argues that since Indian public debt is overwhelmingly rupee-denominated, it represents a transfer of resources within the country rather than a foreign burden. The debt-to-GDP ratio, being a comparison of a stock (debt) to a flow (GDP), creates analytical confusion, with its marginal changes offering little substantive insight. The real concern, Roy notes, should be the crowding-out effect of public debt on domestic savings and the RBI's conflicting roles as monetary policy manager and government banker.
The Shift to a Compensatory Fiscal State
Roy identifies a fundamental transformation in India's economic governance this century: the transition from a development state to a compensatory fiscal state. Unlike development states that invest in the economy and provide quality public goods like health and education—a model seen in the economic transformations of China, Vietnam, and South Korea—India's governments have increasingly directed resources toward compensating citizens who see no improvement in prosperity or economic security despite GDP growth.
This compensatory approach manifests at the state level through electorally rewarding 'freebies' and at the central level through scaled-up subsidies and unemployment safety nets. Under the tight fiscal situation since 2016-17, expenditure on food and fertilizer subsidies, employment guarantees, and cash handouts to poor farmers has consistently exceeded the entire outlay on centrally-sponsored schemes and critical missions for water, health, and education.
The Erosion of Policy Coherence
The first NDA government and NDA-2 up to the 2016-17 budget, according to Roy, demonstrated clear policy coherence with a defined agenda for tax reform, substantial disinvestment, specific expenditure priorities in infrastructure and welfare, and a detailed financial-sector reform strategy. However, this coherence has eroded since 2016-17, leading to contradictory policy signals.
The budget speech for 2026-27 paid scattered attention to manufacturing and initiatives in data centres, semiconductors, and artificial intelligence. However, these lacked integration into a comprehensive industrial policy that addresses legacy sectors and sets clear targets for increasing manufacturing's share in GDP. This confusion reflects broader policy contradictions, such as promoting import substitution under Atmanirbhar Bharat while claiming an export focus, and alternating between support for disinvestment and extolling public sector virtues.
Missing Medium-Term Vision and Market Disappointment
A significant gap highlighted by Roy is the absence of medium-term projections in the budget's macroeconomic and fiscal policy statements. The finance ministry offers no official estimate or forecast for GDP, sectoral shares, employment, or the current account gap for 2030, even as government narratives enthusiastically project visions for 2047. This lack of concrete, forward-looking planning reduces ambitious long-term claims to what Roy terms 'braggadocio' rather than substantive commentary.
The negative response of the Indian stock market to the budget, Roy suggests, stems not from minor tinkering with securities taxes but from a deeper disappointment. Markets, like many citizens, are seeking an official explanation for the disconnect between satisfactory GDP growth and inflation numbers on one hand, and stagnant real wages, weak employment prospects, and muted prosperity on the other. The budget failed to provide a coherent narrative about how and when highlighted progress would translate into tangible improvements in the prosperity of all Indians.
In conclusion, Rathin Roy asserts that the 2026-27 Union budget disappoints by lacking the policy coherence and narrative clarity needed to address India's pressing economic challenges. While commendable in its pursuit of tax administration reform and fiscal prudence, it falls short of offering a credible roadmap to inclusive prosperity, leaving both markets and citizens expecting and deserving better.
