Beyond the Goldilocks glow: Budget priorities on 1 February

The output of the eight core industries grew at 2.6% year-on-year in April–December of FY26, one of the slowest pace in a decade, and it was broad-based, including contraction in natural gas, crude oil and coal. This indicates a subdued industrial pulse and that growth momentum is narrower than the headline narrative suggests.

Public capital expenditure (capex) has been the workhorse of the post-pandemic recovery. But it cannot remain the sole engine indefinitely due to debt dynamics. The Centre’s gross tax revenues grew only 3.3% in April–November of FY26, far below the 10.8% growth assumed for the full year. It is a reminder that even a fiscally-strong state cannot bank forever on buoyant revenues while sustaining elevated public capex.

So, how do you crowd in private investment without fiscal adventurism? By fixing the invisible frictions that raise the cost of capital. One of the biggest is GST design. If input tax credits (ITC) on capital goods remain trapped or unusable, the consumption tax quietly becomes an investment tax. The budget should therefore prioritise clean, credible reform that makes ITC on capital goods fully usable and refundable when it accumulates, rather than leaving it stranded on balance sheets. This reform will boost productivity, and is not a “giveaway."

The other big priority is jobs at scale. India’s employment paradox remains stark: an unusually large fraction of workers still depend on agriculture, even though agriculture contributes a much smaller share to output. This is the root of wage stagnation, rural distress and weak mass consumption. The budget must make labour-absorbing growth central.

That means focusing on MSME credit and compliance simplification, labour-intensive export competitiveness, and targeted cluster strategies in sectors like garments, footwear, food processing, electronics assembly and light engineering. MSME payment delays are a perennial problem, which can now be fixed by linking real-time GST filing and UDYAM data, and automated penalizing of those who squeeze their suppliers. The budget can articulate and strengthen employment-linked incentives.

The third priority is agriculture reform that raises productivity and enables diversification. That means pushing agricultural R&D, climate resilience, irrigation efficiency, post-harvest logistics, and market linkages. Focus must be on incentivising higher-value agri-allied activities—dairy, fisheries, horticulture, and food processing.

A fourth priority is artificial intelligence (AI) and the future of work. India is uniquely exposed: it is both a services powerhouse and a labour-abundant economy. AI can raise productivity sharply, but can also displace routine and mid-skill tasks across offices, factories and platforms. AI allows leapfrogging, for those equipped to do so. For that, we need to invest in reskilling at scale—digital literacy, domain skills, soft skills, and advanced technical training. The budget should treat a national reskilling push as growth investment, not “welfare."

The fifth priority is macro stability. Low inflation today is not a permanent entitlement, and can reverse sharply due to base effects and commodity dynamics. The rupee was the worst-performing currency during 2025, and is still under pressure. Imported inflation remains a threat. The net FDI fell almost to zero, and trade deficit financing has become a new worry. The initiatives on multiple FTA’s will pay off in course of time. The mega announcement of FDI in data centres will help. Meanwhile, the fiscal deficit should be brought down from around 4.4% of GDP towards 4%. This adjustment has to be quality-driven: protect capex, cut waste, and improve tax administration.

The sixth priority is the external and financial environment. The MSCI India’s underperformance (2%) compared to MSCI emerging markets (30%) was the worst in three decades. Volatility has risen. India cannot remain insulated from global trade uncertainty. In such a setting, the budget should emphasize export competitiveness, stable tariff policy, and faster trade facilitation—so that external turbulence does not translate into domestic fragility.

Lastly, the budget must lay out a clear medium-term reform road map: a credible path for debt and deficits; a strategy for private investment and manufacturing competitiveness; a plan for logistics and urban infrastructure; a human-capital and reskilling mission suited to an AI era; and an agricultural transformation strategy that raises productivity while reducing climate vulnerability.

There are many transitions happening. The Sixteenth Finance Commission will soon submit its recommendation, a census is being undertaken after a long hiatus, and the politically sensitive delimitation work will start. In such a transition year, stability is policy. With a new income-tax framework being rolled out, the finance minister (FM) should limit herself to only essential changes and on high-quality rule-making, stakeholder consultation and robust dispute resolution. Reducing litigation and compliance burdens can yield growth dividends larger than many tax rate cuts.

In short, 1 February should not be about celebrating a Goldilocks moment. It should be about using that moment—while the macro is relatively calm—to undertake reforms that are politically feasible precisely because there is no immediate crisis. The economy’s mixed signals—subdued core-industries growth, uneven tax buoyancy, persistent employment distortions, AI risks, rupee weakness and market volatility—are not contradictions. They are the real map. The FM’s priority should be to read that map honestly, and turn today’s resilience into tomorrow’s inclusive, job-rich, private-investment-led growth.

The author is senior fellow with Pune International Centre.