Introduction
The Union Budget 2026–27 marks a significant crossroads in India’s fiscal trajectory, balancing macroeconomic austerity with targeted investments in growth, infrastructure, and social development. The budget displays a cautious but strategic approach in light of post-pandemic budgetary recalibration, domestic structural reforms, and weak global growth. According to the budget, it prioritises capital investment, manages fiscal deficits, and realigns expenditure priorities while seeking to foster cooperative federalism through higher transfers to states.
Macroeconomic Context and Fiscal Aggregates
The government has forecast a nominal GDP growth rate of 10% for 2026–27, combining real growth and inflation projections. The estimated total expenditure is ₹53.47 lakh crore, which is 7.7% more than the updated 2025–2026 estimates. Fiscal restraint is still crucial despite this growth, with the fiscal deficit aimed at 4.3% of GDP—slightly less than the revised forecast of 4.4% in the prior year.
The fact that the revenue deficit is kept at 1.5% of GDP shows that borrowing is still necessary to pay for ongoing expenses. With interest payments making up 26% of total expenditures and 40% of income collections, they represent a significant structural restriction that highlights the limited budgetary headroom available for discretionary spending.
Revenue Mobilisation and Tax Trends
The expected ₹36.52 lakh crore in receipts, excluding borrowings, is a 7.2% increase above the revised forecasts for 2025–2026. The expected 8% rise in gross tax income is still below nominal GDP growth, indicating conservative revenue estimates. The main sources of growth are still direct taxes, with income tax forecast to increase by 11.7% and corporation tax by 11%.
On the other hand, collections of the Goods and Services Tax (GST) are comparatively stagnant. CGST is expected to increase by just 6.3%, while total GST revenue is expected to slightly decrease in comparison to updated projections. This illustrates fundamental issues with indirect tax compliance and buoyancy, especially in a setting with limited consumption.
After several years of underperformance, it is anticipated that capital revenues, excluding borrowings, will climb significantly to ₹1.18 lakh crore, mostly due to a disinvestment objective of ₹80,000 crore. The budget includes the execution difficulties related to this revenue source by pointing out that the government only achieved 71.9% of its disinvestment target in 2025–2026.
Expenditure Composition and Capital Emphasis
The budget for 2026–2027 places a strong emphasis on capital expenditures, which are expected to rise by 11.5% while revenue expenditures would only rise by 6.6%. The government’s goal of using public investment to crowd in private capital and foster medium-term growth is reinforced by the capital outlay of ₹9.43 lakh crore.
Advances and loans, including interest-free capital loans to states, increased dramatically by 33.8% to ₹2.79 lakh crore. Of this, ₹1.85 lakh crore has been designated for special capital expenditure loans to states, indicating a sustained effort to construct decentralized infrastructure.
Transfers to States and Federal Fiscal Architecture
Transfers to states have increased by 12.2%, totaling ₹26.21 lakh crore. This comprises ₹10.94 lakh crore in grants and loans and ₹15.26 lakh crore in tax devolution. In line with the 16th Finance Commission’s recommendations, the increased transfer represents both greater devolution and capital support.
However, the expected Finance Commission grants for 2026–2027 are ₹1.29 lakh crore, a 15% decrease from the previous year’s revised forecasts. This is largely due to the cessation of revenue deficit and sector-specific grants, reflecting a structural shift in intergovernmental fiscal transfers.
Sectoral Allocation Priorities
At ₹7.85 lakh crore, or 15% of overall expenditure, Defense continues to get the largest allocation among ministries, with a 17.6% increase in defense capital expenditures. The capex-led growth approach is further supported by notable increases in infrastructure-related ministries including Housing and Urban Affairs, Railways, and Road Transport and Highways.
Allocations to social sectors exhibit conflicting patterns. Education expenditure grows by 14.2% to ₹1.39 lakh crore, while Health and Family Welfare receives ₹1.07 lakh crore, a 10% increase over revised forecasts. Even though these advances are noteworthy, they are still small in comparison to the scope of systemic issues with health and educational results.
Major Schemes and Programme Realignments
Significant revamping of key programs is reflected in the budget. The Viksit Bharat Gram Rozgar Mission (VB-G RAM G) emerged as the largest initiative with an allocation of ₹95,692 crore, following the replacement ofMGNREGA in December 2025. Nevertheless, ₹30,000 crore continues to be provided to MGNREGA, suggesting a progressive transition rather than abrupt withdrawal
Following significant underutilization in 2025–2026 revised estimates (₹17,000 crore against a targeted ₹67,000 crore), the Jal Jeevan Mission predicts a sharp recovery to ₹67,670 crore. PMAY-Urban and PMAY-Rural show similar patterns of underspending followed by rapid increases, suggesting ongoing implementation difficulties rather than changes in policy purpose.
One noteworthy aspect is the resurgence of investment in innovation. Although past underutilization raises concerns about absorptive capacity, the Research, Development and Innovation (RDI) Scheme has been awarded ₹20,000 crore, a more than five-fold increase over revised forecasts.
Deficits, Debt, and Fiscal Sustainability
The budget continues on a course of modest fiscal consolidation. As a result of better non-interest spending management, the primary deficit drops to 0.7% of GDP. From the epidemic peak of 61% of GDP in 2020–2021, outstanding obligations are expected to be 55.6% of GDP. In accordance with the Finance Commission’s recommendations, the government has reaffirmed its goal to reduce debt to about 50% of GDP by 2031.
Conclusion
A calibrated approach to fiscal management is reflected in the Union Budget 2026–2027, which strikes a balance between growth-oriented spending and consolidation. Long-term development goals are in line with the focus on infrastructure, capital expenditure, and state-level investment. Nonetheless, there are also ongoing issues with scheme execution, revenue buoyancy, and the structural burden of interest payments. The effectiveness of the budget’s execution and its capacity to convert fiscal aim into long-lasting social and economic results will ultimately determine its success more than just appropriations.
Clear Cut Research Desk
New Delhi, UPDATED: Feb 02, 2026 01:00 IST
Written By: Nidhi Chandrikapure
