Shivanand Pandit
Budget 2026 is just around the corner. It will be the ninth consecutive Budget presented by a finance minister—an achievement in itself. Adding to the list of firsts, it will be presented on a Sunday, a rare occurrence. While these two milestones relate to time, the third is about place: departing from tradition, the Budget will be presented from a brand-new venue, Kartavya Bhawan, which is part of the newly developed Central Vista complex in New Delhi.
As preparations for the 2026–27 Union Budget gain momentum, India is charting its course through a challenging global landscape shaped by geopolitical strains and elevated US tariffs. Despite these external pressures, the first advance estimates for 2025–26 have delivered a pleasant surprise: GDP growth is pegged at 7.4 per cent, well above the Reserve Bank of India’s earlier projection of 6.5 per cent. Beyond providing reassurance, the data conveys a stronger message — structural reforms are yielding tangible results, and pushing them further will be critical to maintaining high growth.
The advance estimates point to a clear revival in economic momentum. Growth in the first half of 2025–26 was notably robust, clocking 7.8 per cent and 8.2 per cent in the first and second quarters, respectively. Although growth is expected to ease to around 6.9 per cent in the latter half of the year, the overall outlook remains firmly positive. Just as important is the rise in average growth over the past three years, now close to 8 per cent. This trend reinforces the view that India may be transitioning from a post-pandemic recovery to a more sustained growth phase — provided the pace of reforms is sustained and not allowed to lose momentum.
An Acid Test for Growth Revival
India navigated formidable global headwinds in 2025, yet decisively dispelled fears that steep trade barriers—most notably the United States’ imposition of 50% tariffs—would significantly derail its economic momentum. Contrary to apprehensions, the Indian economy demonstrated remarkable resilience. This strength was not accidental; it was underpinned by a series of sustained, reform-oriented policy measures undertaken by the government. Budget 2026–27 has the opportunity to further energise and institutionalise this mission. At a time of global uncertainty, India must increasingly rely on strengthening its domestic engines of growth. This requires a careful balancing act—prioritising growth-enhancing productive capital expenditure and targeted social sector spending, while remaining firmly committed to fiscal consolidation and keeping public debt risks under control. The forthcoming Budget must therefore act as both a growth catalyst and a credibility anchor.
The government should sustain and deepen its focus on defence, particularly by enhancing capital expenditure. Defence modernisation is not only a strategic imperative but also a powerful driver of manufacturing, innovation, and employment. The share of capital outlay within defence expenditure should be increased to at least 30%, up from the budgetary estimate of 26.4% for 2025–26. In parallel, the allocation for the Defence Research and Development Organisation (DRDO) should be raised by a minimum of ₹10,000 crore to accelerate indigenous design, development, and innovation in advanced defence technologies. India’s defence industrial corridors in Uttar Pradesh and Tamil Nadu have already demonstrated tangible progress in promoting indigenisation and expanding domestic defence production. Building on this success, the government should consider establishing a defence industrial corridor in eastern India, which would promote regional balance, unlock new manufacturing clusters, and integrate eastern states into the defence production ecosystem.
Private enterprises have emerged as key contributors to India’s growing defence exports, accounting for nearly 65% of total defence exports in 2024–25. To further amplify this momentum, the government should consider establishing a dedicated Defence Export Promotion Council. Such a body would improve coordination among the armed forces, their foreign directorates, defence public sector undertakings, private manufacturers, the Ministry of Defence, the Ministry of External Affairs, Indian embassies, and foreign governments and buyers. Enhanced institutional coordination will be critical in achieving India’s ambitious defence export target of ₹50,000 crore by 2028–29.
The global transition towards clean energy, electric mobility, advanced manufacturing, semiconductors, and other strategic technologies is intensifying demand for critical minerals. The National Critical Mineral Mission (NCMM), approved in early 2025, provides a robust strategic framework to secure these essential inputs. However, its scope can be meaningfully expanded by introducing a dedicated critical minerals tailings recovery programme under the NCMM. Such a programme would focus on extracting valuable minerals from mining tailings, enhancing resource efficiency and sustainability. Dedicated financing mechanisms for tailings recovery should also be considered to crowd in private participation.
Exports need fresh and strong policy support in the present global trade situation. The current allocation of around ₹18,233 crore under the RoDTEP scheme is not enough to cover the rising costs faced by exporters. Increasing this allocation significantly will help make Indian exports more competitive and boost export-led growth. India has emerged as the preferred global destination for Global Capability Centres (GCCs), delivering advanced services across technology, finance, engineering, and research. However, the existing transfer pricing framework has not progressed in line with this development. To ensure clarity and minimise disputes, the government should issue well-defined guidance on suitable transfer pricing approaches for various GCC models, aligned with their changing functions and risk structures.
Drones represent a strategic growth frontier with applications across defence, agriculture, logistics, infrastructure, and disaster management. To accelerate adoption, enhance global competitiveness, and boost exports, the government should catalyse scale through targeted financial support. This could include increasing the production-linked incentive (PLI) outlay from ₹120 crore to ₹1,000 crore and establishing a ₹1,000 crore dedicated drone research and development fund to support innovation and advanced manufacturing.
Deepening the corporate bond market is essential to diversifying financing sources beyond the banking system. The government should consider lowering the qualifying borrowing threshold and expanding eligibility to include both listed and unlisted corporates, thereby widening the issuer base and stimulating bond supply. Measures to encourage large corporations to diversify borrowings through market issuances are also needed. Investment caps for insurance companies, currently set at 25%, should be enhanced, and the ‘Approved Investment’ rating threshold could be revised from AA to AA-, allowing prudent exposure to high-quality but slightly lower-rated issuers. Additionally, permitting provident funds to invest in non-convertible debentures issued by infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) would channel long-term capital into infrastructure aggregation vehicles.
Addressing the growing pendency of tax disputes must be a priority. The first appellate authority in direct tax matters—the Commissioner of Income Tax (Appeals) or CIT(A)—is grappling with a severe backlog, exacerbated by nearly 40% vacancies. A structured prioritisation framework is needed, focusing on high-pitched assessments, cases with complete submissions, matters covered by jurisdictional High Court or Supreme Court rulings, appeals pending for over five years, and chronologically old cases. Introducing a dual-track disposal system—fast-tracking simple or low-value cases while allocating complex or high-value disputes to a detailed track—would significantly improve efficiency.
Newly incorporated companies are currently ineligible for Authorised Economic Operator (AEO) certification, even when they belong to established AEO-accredited groups. Removing this restriction for such groups would enhance trade facilitation, reduce compliance friction, and improve logistics efficiency. Customs tariff reforms initiated in the previous Budget must continue with renewed vigour. Further rationalisation of tariff slabs would help streamline the duty structure, correct inverted duty anomalies, and support trade competitiveness. Import duties should be calibrated across the value chain to strengthen domestic manufacturing while ensuring cost-effective access to inputs.
To strengthen India’s manufacturing base, the Clean Tech Manufacturing Mission and the National Manufacturing Mission announced in the Budget should be implemented without delay. India must develop strong capabilities in technologies that are shaping global industrial competition. Areas such as semiconductors, solar PV modules, batteries, electrolysers, and critical minerals are not only key technologies but also strategic and geopolitical priorities. At present, India depends heavily on imports for many of these inputs, which increases supply chain vulnerabilities and weakens strategic independence. The country must therefore make a strong push towards green and digital manufacturing. At the same time, sustained investment in infrastructure is crucial, as high-quality infrastructure and well-developed urban ecosystems are essential for manufacturing growth. The use of blended finance, risk-sharing mechanisms, and modern public–private partnership models can attract large volumes of private investment and help bridge India’s infrastructure gap.
The cost of capital in India needs to come down. At present, the average cost of capital is about 400–600 basis points higher than in other major economies. Achieving fiscal consolidation is essential to reduce this gap. When the Centre and States borrow a large share of available funds, capital becomes scarcer and more expensive for the rest of the economy. Institutional requirements further add to this pressure, as banks are mandated to invest 18% of their assets in government securities under the statutory liquidity ratio (SLR), with similar obligations imposed on insurance companies. A gradual reduction in the SLR would release more funds into the system and help lower borrowing costs. Alongside this, deeper corporate bond markets would enable companies to raise more funds through bond issuances instead of relying mainly on bank loans.
Innovation policy needs a fundamental shift—from dispersed grants to mission-driven development. A dedicated national programme that awards $1 million grants to 500 academics from the world’s leading universities would help attract top global talent. Alongside this, a structured sabbatical scheme inviting 1,000 academics, supported by grants of $100,000 with provision for top-ups, would significantly enhance knowledge transfer and ecosystem building. Commercial innovation remains a major blind spot in the current ecosystem, largely due to weak industry–academia collaboration. International models such as the Warwick Manufacturing Group (WMG) at the University of Warwick in the UK offer valuable lessons. WMG undertakes industry-oriented research, delivers academic programmes, and provides support to small and medium enterprises. Its extensive partnerships with the Tata Group, including Tata Motors, illustrate the effectiveness of this approach. Similar centres should be established across the country, beginning with the Institutes of Eminence.
India’s fiscal consolidation since the pandemic has been sharp and credible, following the temporary countercyclical measures during Covid. However, this has come at the cost of muted growth in general government expenditure, which stood at 27.4% of GDP in FY25, slightly below 27.8% in FY17. Over the longer term, the ratio has risen modestly from 26.6% in FY13, largely driven by state spending, highlighting that consolidation has relied as much on expenditure control as on resource mobilisation. While savings from unproductive revenue expenditure have created fiscal space for capital spending, social infrastructure outlays have also been constrained.
The FY27 Budget will be framed amid likely further slippage in the Centre’s total expenditure from the budgeted 14.2% of GDP. Gross tax revenues grew just 3.3% in April–November, against a full-year target of 12.5%, reflecting low tax buoyancy due to deep income tax and GST cuts. Achieving the FY26 fiscal deficit target of 4.4% may thus require significant expenditure compression, as evidenced by the Centre’s revenue spending growth of only 1.8% in April–November.
A positive, however, is that capital expenditure grew 28.2% in the same period—more than four times the budgeted pace—reflecting a focus on quality spending. States, by contrast, grew capex by just 10% and had utilised only 38.3% of budgeted allocations by November-end. Accelerated investment in infrastructure, health, education, and R&D is critical to boosting growth potential and achieving the Viksit Bharat vision.
Over the next five years, India’s tax-to-GDP ratio must rise by at least five percentage points from the current 18%, the lowest among BRICS nations, with a corresponding increase in general government expenditure net of interest payments. While raising rates is not an option, expanding the tax base and improving compliance are essential. Over ₹16.5 lakh crore in direct taxes and a similar amount in indirect taxes remain stuck in litigation, together accounting for nearly 60% of the Centre’s current annual Budget.
The Budget for 2026–27 should prioritise sustaining India’s growth momentum by enhancing competitiveness across key sectors and fortifying domestic drivers of expansion. By blending fiscal discipline with measures to unlock growth across industries, providing policy certainty, and addressing structural bottlenecks, the Budget can attract private investment and bolster India’s position in the global economy.
Hopefully, this year’s budget proposals will be as sweet as the traditional ‘halwa’ that is being stirred once again.
