Economists Call for Growth-Focused Budget with Fiscal Prudence
Leading economists C. Rangarajan and D.K. Srivastava have presented a clear vision for India's upcoming 2026-27 budget. They emphasize the government must carefully balance two critical objectives. The budget should actively support economic growth while simultaneously pursuing fiscal consolidation.
Current Economic Landscape and Projections
The National Statistics Office provides the foundation for budget planning. Its first advance estimates show India's real GDP growth for 2025-26 at 7.4%. The nominal GDP growth is pegged at 8.0%. Looking ahead to 2026-27, projections shift. Economists anticipate real GDP growth around 6.5%. Nominal GDP growth could reach approximately 9.5%, partly due to expected higher inflation in Consumer and Wholesale Price indices.
These figures translate into concrete numbers for policymakers. The nominal GDP for 2025-26 is estimated at ₹357.14 lakh crore. Applying the 9.5% growth projection gives a 2026-27 estimate of ₹391.1 lakh crore. Budget makers will use these numbers as their starting point.
Revenue Realities and Fiscal Targets
Recent data reveals challenges in revenue collection. From April to November 2025-26, the Centre's gross tax revenues grew by only 3.3%. This falls significantly short of the budgeted full-year growth target of 10.8%. While growth may improve in the final four months, it will likely miss the original goal.
Several factors could offset this shortfall. Revenue from recent GST reforms was not included in the 2025-26 budget. New central excise taxes on tobacco and the Health Security Cess will add funds. Higher dividends from the Reserve Bank of India provide an additional cushion. With revenue expenditures growing a modest 1.8% in the first eight months, meeting the fiscal deficit target of 4.4% of GDP appears feasible, especially with lower inflation reducing real expenditure impacts.
The Path to Fiscal Consolidation in 2026-27
The 2025-26 budget signaled a shift. The Centre announced it would focus on reducing the debt-to-GDP ratio annually as its primary fiscal goal. However, economists argue the fiscal deficit remains a crucial operational target. A clear, medium-term path is essential.
They propose reducing the fiscal deficit to 4.0% of GDP in 2026-27. This represents a 40 basis point decrease. In monetary terms, this equates to a fiscal deficit of approximately ₹15.83 lakh crore. The government must clearly outline the year it plans to achieve the debt-to-GDP ratio mandated by the Fiscal Responsibility Act. A transparent annual deficit reduction plan is vital for credibility and planning.
The fiscal deficit figure is critical. It shows exactly how much the government draws from the pool of national investible resources. With household financial savings declining as a share of GDP, the government must borrow less to free up capital for private investment.
Estimating Resources and Expenditure Priorities
Based on their analysis, the economists project the Centre's gross tax revenues for 2026-27 at ₹43.9 lakh crore. This assumes a tax buoyancy of one. Correspondingly, net tax revenues should reach ₹29.2 lakh crore. Non-tax revenues and non-debt capital receipts are expected to grow at the nominal GDP rate, estimated at ₹7.2 lakh crore and ₹0.8 lakh crore respectively.
This creates total non-debt resources of about ₹37.1 lakh crore. To achieve the proposed 0.4 percentage point reduction in the fiscal deficit, spending adjustments are necessary. The revenue expenditure-to-GDP ratio needs to drop from 10.7% to 10.3%. Meanwhile, the capital expenditure-to-GDP ratio should increase by 0.1 percentage points. Spending on the employment guarantee scheme may also decrease, as states now bear 40% of the cost.
Unlocking Private Investment for Sustained Growth
A major concern remains the sluggish pace of private investment. The real gross fixed capital formation-to-GDP ratio has averaged 33.6% from 2022-23 to 2024-25. It saw only a marginal increase to 33.8% in 2025-26. Recent policy moves like GST rate cuts and repo rate reductions aim to boost consumption. This should eventually stimulate private investment, but the effect may be delayed.
Global factors also play a role. Investment sentiment will likely improve once global supply bottlenecks ease and worldwide growth accelerates. In the interim, the Centre must maintain its capital expenditure momentum to support the economy.
The key question demands an answer. Why has private investment not picked up significantly? The upcoming budget presents an opportunity. It must include targeted, sector-level interventions to address this very issue and unlock India's full growth potential.
C. Rangarajan is the chairman of the Madras School of Economics. He formerly served as Governor of the Reserve Bank of India and chaired the Prime Minister's Economic Advisory Council. D.K. Srivastava is a member of the advisory council to the Sixteenth Finance Commission and former director of the Madras School of Economics. The views expressed are their own.
