2025-26 Union Budget: India’s Economic Path Forward

The 2025-26 Union Budget came at a time of moderating domestic growth and heightened global uncertainty. At a recent joint session of the India CEO, CFO, CHRO, CMO, ISF and CFO NxT Forums, AK Bhattacharya, Editorial Director of the Business Standard, provided a medium-term outlook for the Indian economy. He assessed the Budget’s key policy announcements and their impact on India’s growth trajectory. Further, he examined the prospects for reforms and fiscal consolidation, as well as the challenges and opportunities that lie ahead.

Introduction to the Budget

This year’s Budget marks a significant political and economic shift. Seven months ago, the government, weakened by its disappointing performance in the General Elections, prioritised coalition interests and job creation. However, unexpected electoral wins in Haryana and Maharashtra have strengthened its position, enabling a strategic pivot. Moving away from capex-driven growth, the Budget emphasises consumption-led demand through tax benefits while increasing state capex loans and pushing states to utilise unspent funds. Politically, it balances economic priorities with electoral strategy, reinforcing governance and political capital. On the whole, the Budget delivers on four of the government’s five key promises: 

• Unified Pension Scheme: This limits the fiscal risks arising from a possible reversion to the OPS.

• Customs duty rationalisation: Continued reductions (40 items this year, 50 last year) enhance trade competitiveness while maintaining balanced protectionism.

• Income tax reforms: Tax cuts and a new Income Tax (Amendment) Bill aim to boost consumption.

• Debt anchor and fiscal consolidation: This targets a 50% debt-to-GDP ratio within five years. Future Budgets will report figures for both the overall fiscal deficit and the debt level, ensuring transparency.

• Economic policy and factor market reforms: Labour reforms may roll out at the state level from April, alongside expanded agricultural support and a Rs 220 billion budget increase.

Shifting from Capex to Consumption

The Budget prioritises consumption-driven growth, offering tax relief to 40 million taxpayers to spur demand and private investment. The expectation is that increased consumer spending will drive production, prompting business expansion. However, with household debt at 42% of GDP, if savings are directed towards reducing debt rather than consumption, the intended stimulus may not materialise. Simultaneously, the Budget also reflects the government’s frustration with India Inc’s reluctance to invest despite sustained public spending and a range of incentives.

With corporate tax rates now lower than individual rates, the government appears to be shifting focus towards middle-class tax relief. Prioritising household-led over corporate-driven growth aims to boost demand, but concerns remain about whether this will translate into higher spending or merely ease households’ financial burden. While the inflationary risks are low, the disconnect between the government and the private sector is widening. A more balanced approach—combining consumption-driven stimulus with private investment incentives—would have been more effective. Expanding capex remains challenging due to systemic inefficiencies. The government has reclassified ‘grants-in-aid’ as capex to maintain spending levels, but a more strategic allocation of funds would ensure sustainable growth rather than relying solely on tax cuts.

Fiscal Discipline and Spending Efficiency

The Budget sends a clear message: states must utilise central funds efficiently before receiving additional allocations. With Rs 1.6 trillion in unspent funds, unlocking these resources is key to improving fiscal management. However, the broader issue is the government’s ability to scale up spending. An election-related slowdown aside, the core challenge is institutional absorptive capacity—the ability to deploy funds effectively. Capex declined until December, saw some recovery in January, yet is unlikely to meet the year’s Rs 11.1 trillion target, raising concerns over the feasibility of large-scale commitments.

 At the national level, reducing the fiscal deficit to 4.4% in the coming year and the debt-to-GDP ratio to 50% over five years is ambitious but feasible. Spending buffers exist—Rs 1 trillion in last year’s capex savings and Rs 470 billion earmarked for new schemes. However, slow GST and corporate tax growth, geopolitical risks and muted consumption pose challenges. With India’s inclusion in global bond indices, external financing will be crucial, making prudent debt management essential. While the Budget lacks a fully integrated economic strategy, its strong fiscal discipline signals a structured approach to public finance.

Policy Shift on Disinvestment

The absence of the term ‘disinvestment’ in the Budget signals a notable shift in government policy. While the 2021 strategic disinvestment plan identified multiple PSUs for sale, recent budget documents have replaced ‘disinvestment’ with ‘asset monetisation,’ categorising it under ‘miscellaneous capital receipts.’ This shift appears politically motivated rather than economic in nature, as selling public sector assets has historically triggered a backlash, as seen during the Vajpayee government’s tenure.

However, the government cannot entirely abandon asset sales. Rather than outright disinvestment, a more strategic approach—such as enforcing public listing norms for the 28 listed PSUs—could have ensured market discipline while generating revenue. The shift reflects a reluctance to face political consequences rather than a fundamental change in economic policy. As fiscal consolidation gains prominence, asset monetisation may emerge as a more palatable alternative, but its effectiveness in driving efficiency and revenue generation is uncertain.

Balancing Incentives and Regulatory Reforms

The government’s reluctance to introduce significant R&D incentives or revive the capital amortisation scheme reflects a policy shift towards structural reforms over direct corporate benefits. (The scheme was considered but ultimately rejected due to procedural complexities and concerns about favouritism.) On R&D, while no direct tax incentives have been introduced, the Rs 1 trillion corpus from the previous budget has been operationalised, with budgetary support covering running costs. Success depends on increased private sector participation and effective execution, reinforcing a market-driven rather than subsidy-dependent approach.

 Regulatory reforms are advancing, particularly in the non-financial sector, while financial deregulation remains complex due to the RBI’s strict oversight. The establishment of consultative mechanisms under the Financial Stability and Development Council (FSDC) marks progress towards reducing regulatory micromanagement. The Economic Survey’s focus on deregulation aligns with the Budget’s approach, including the formation of a committee for the non-financial sector, with a financial counterpart expected to follow. These steps indicate a shift towards systemic efficiency rather than ad hoc interventions.

External Sector: FDI, Exchange Rates and Trade Policy

The proposal for 100% FDI in insurance is unlikely to attract immediate investment due to legal uncertainties, stringent regulations and tax changes. With 77% of taxpayers opting for the new tax regime, insurance policies must now compete on merit rather than tax incentives. Global insurers remain cautious amid ongoing legal and regulatory hurdles. The government acknowledges these concerns, proposing FSDC oversight to curb overregulation, but unless broader structural reforms address these issues, foreign insurers may remain hesitant. On the currency front, controlled rupee depreciation reflects a shift away from artificial pegging, with Rs 90/USD emerging as a policy benchmark. This affects inflation, export competitiveness and import costs—particularly since 36% of exports are import-intensive. Rather than imposing tariff hikes, it allows currency movements to regulate trade imbalances.

While the Budget takes a pragmatic approach to trade and currency management, its stance on regional trade agreements remains a point of concern. India has yet to actively engage with major trade blocs like RCEP, limiting its access to global supply chains. The government’s ongoing review of its bilateral investment treaty (BIT) model is a step in the right direction, particularly in refining agreements like the UAE BIT, which aims to balance investment protection with regulatory sovereignty. Yet India continues to lag competitors like Vietnam, which have aggressively leveraged regional trade agreements to attract foreign investment and integrate into global value chains.

In a protectionist global climate, India must deepen its trade partnerships to remain competitive. Regardless of how ‘Vikasit Bharat’ is envisioned, disengagement from global markets is not a viable long-term strategy. Recent diplomatic engagements, including visa relaxations with China, indicate a broader geopolitical recalibration, but the Budget does not provide a clear roadmap for navigating an increasingly volatile trade environment.

Key Issues and Challenges

The Budget attempts to balance fiscal constraints with economic priorities, but key challenges remain:

• Weakening economic growth: Long-term investments in agriculture and nuclear energy are promising, but capex growth has been modest, rising from ~2% to 3.4% of GDP over a decade. Sustained momentum is critical to achieve a structural transformation.

• Fiscal reforms and debt sustainability: Fiscal reforms are progressing, but total government debt (~85% of GDP) remains a concern, particularly for foreign investors. A combined Centre-state debt presentation would offer clearer fiscal insights.

• Foreign investment concerns: The Budget does little to address declining net FDI inflows, which have recently turned negative. Investor concerns regarding regulatory stability and ease of doing business remain largely unaddressed, impacting external financing.

• Administrative and structural reforms: A shift towards consultative policymaking is evident, particularly in financial and non-financial sectors. Moving away from unilateral decisions could enhance policy execution and regulatory efficiency.

In sum, while this year’s Budget lays a foundation for long-term growth, its success will depend on execution, private sector response and evolving global conditions.