Ajit Ranade: By betting on capabilities, the budget takes a long view on India’s growth

Finance minister Nirmala Sitharaman, who created a record by presenting her ninth consecutive budget to Parliament, chose not to be too complacent about the apparent ‘Goldilocks’ type macroeconomic situation India is experiencing.

That’s because behind that growth momentum is a strong capital-expenditure push by the Union government, which, at some point, will need to ease. Low inflation prints have been mainly due to sharp food-price deflation, and that too can turn nastily.

Hence, notwithstanding today’s macroeconomic comfort, the finance minister’s approach in her budget has been to focus on building capabilities with a longer-term perspective. This approach is visible in various schemes for enhancing human capital and skills, strengthening industry-academia linkages and adding tangible elements to support the crucial constituency of small businesses.

But before dwelling on the admirable capability-building initiatives, it will be useful to look at the budget’s fiscal arithmetic. We need to assess how credible the budget’s projections are. Total spending is projected to increase to ₹53.5 trillion in 2026-27, or a modest 7.7% over the revised estimate for 2025-26. Total revenue, excluding borrowings, is seen growing 7.2% to ₹36.5 trillion, which is slightly slower than the growth in expenditure.

The growth in these budget numbers is only somewhat higher than our growth in real GDP. But since the implied nominal GDP growth is 10% in the budget, and since inflation is expected to whipsaw back to 4% or 5%, it means real GDP growth is expected to be much lower.

Is the finance minister foretelling a slowdown in the economy’s momentum? Nevertheless, both expenditure and revenue projections are conservative, which explains the Centre’s success in fiscal prudence.

The finance minister reminded us that she kept her promise made four years ago of bringing down the fiscal deficit to under 4.5% and keeping it there. This is important to retain the higher sovereign rating that India recently won from some international agencies. A better rating helps lower the cost of foreign capital and will also be crucial in plugging our dollar shortage and cushioning falls in the rupee’s exchange rate.

Even with tight fiscal limits, the finance minister has allocated about a tenth more for capital spending (i.e. on infrastructure), at ₹12.2 trillion, which means that the government’s capex push will continue to support growth. The gross borrowing of the Union government at ₹17.2 trillion plus a further ₹12.6 trillion by states will mean a tsunami of sovereign and sub-sovereign paper flooding the bond market.

No wonder that long bond yields are stubbornly stuck close to 7% despite heroic monetary easing by the Reserve Bank of India. The corporate bond market will not flourish in this suffocating atmosphere. Unless fiscal consolidation continues with vigour, it faces a troubling cost-of-capital overhang which will also constrain long-term growth.

Apart from the fiscal tightrope walk, the budget does well to focus on building growth-enhancing capabilities. The target of achieving a global share of 10% in services is bold. This would include not just software, but also content creation, design, health and tourism, and will need skill building. The proposed standing committee on education for employment and enterprise will look at the future of work and presumably chart out a path for services dominance.

For manufacturing, there is a detailed sector-wise plan, including for strategic and frontier sectors like rare earths, bio-pharma, electronics and nuclear energy. The cluster approach taken is noteworthy, involving the linking of education and training institutes with sectoral clusters in textiles and leather goods, and also a revival of more than 200 legacy industrial clusters.

The detailed attention to specific measures for small and medium enterprises has not come too soon. As small enterprises formalize, it is vital that issues like excessive payment delays and their need to finance their working capital through efficient bill discounting be addressed. Thus, making large companies participate in the country’s TReDS exchange was long overdue and is welcome. Linking GST invoicing to the Udyam portal should also have been done to deter payment delays.

Once India becomes a developed country, the annual presentation of the budget ought to become a non-event. At best, it should serve as an occasion for delivering a state-of-the-economy speech and articulating a long-term vision or fiscal roadmap. Growth in a developed economy is delivered mostly by the private sector, for which investors look for stability, predictability and continuity in tax policies.

On this, the budget has done well to not tinker with too many rates. Its projections are credible and conservative. There is an acknowledgement of challenges and it eschews any premature celebration of our macroeconomic success. The message of the budget is that the government will help build growth-sustaining capabilities but also exercise fiscal restraint.

The author is senior fellow with Pune International Centre.