Rathin Roy: Why the budget lacks the coherence needed to tackle India’s real economic challenges

The structural fiscal constraint: The government of India has been shrinking. While its total expenditure-to-GDP ratio was 12.8% in 2016-17 and will be 13.6% in 2026-27, this 0.8-percentage-point increase exactly matches the increase in its fiscal deficit during that period. The covid jump in expenditure (and deficits) and subsequent correction masks this long-term trend.

Despite reasonable growth, there has been no tax buoyancy. Non-tax revenue is largely driven by large dividends paid by the Reserve Bank of India (RBI), a fiscal feature unheard of in any serious country. Disinvestment has been an utter failure. Fiscal prudence is therefore a necessity, not an unconstrained policy choice.

The move to target debt rather than an annual fiscal deficit is just optics. Indian public debt is overwhelmingly rupee-denominated. It transfers resources from Indians to their government and is hence not a ‘burden’ equivalent to private debt (foreign debt is a different matter). The debt-to-GDP ratio is a confusing metric—debt is a stock and GDP a flow, so tracking marginal changes in the debt-to-GDP ratio makes little analytical sense. The flow-equivalent change in debt as a ratio of GDP is fully determined by the fiscal deficit-to-GDP ratio.

Policymakers need to keep an eye on the stock of public debt because of its ‘crowding out’ effect, the distribution of domestic savings between the public and private sectors and RBI’s conflict of interest in its roles as India’s manager of monetary policy and also its government’s banker. But changing the target from the deficit to the level of debt for macro-fiscal reasons is purely cosmetic.

Compensatory fiscal state: The economic focus of the central government (and also state governments) has fundamentally changed in this century. India is no longer a development state, investing in the economy and providing quality merit goods like health and education.

Governments have comprehensively failed to foster inclusive prosperity, although success in this area is at the core of the economic transformations of countries like China, Vietnam and South Korea. Conversely, stagnation associated with a ‘lower middle-income trap’ has marked the contemporary economic history of many developing countries from Brazil and Egypt to South Africa and Thailand.

In the latter countries, public resources are increasingly directed towards compensating the majority of citizens who see no increase in their prosperity or economic security despite increasing GDP levels.

This is now also the case in India. State governments do this by increasing outlays on what are called ‘freebies.’ In recent elections in Maharashtra and Bihar, these have proven electorally rewarding.

The central government compensates at scale through subsidies and unemployment safety nets. Under the tight fiscal situation that has prevailed since 2016-17, total expenditure on food and fertilizer subsidies, employment guarantees and cash handouts to poor farmers stood at 1.52% of GDP in 2019-20 and 1.59% in 2025-26. This is larger than the entire outlay on centrally-sponsored schemes and India’s water, health and education missions.

Policy coherence: The first National Democratic Alliance (NDA) government had policy coherence, as did NDA-2 up to the 2016-17 budget. A clear agenda for tax-policy reform was enunciated, political capital was devoted to substantial disinvestment and specific expenditure priorities—infrastructure and welfare support—were identified. Moreover, a fiscal discipline roadmap was laid out and a detailed financial-sector reform strategy was articulated. It was clear that import substitution and industrial policy were not priorities for the centre-right government.

This changed after 2016-17. Atmarnibhar Bharat implied import substitution, but the government claimed it had an export focus. The government first supported disinvestment and then extolled the virtues of the public sector.

This confusion is apparent in the budget for 2026-27. The speech paid scattered obeisance to manufacturing and initiatives like data centres, semiconductors and artificial intelligence. Ideally, these should have been embedded in an industrial policy covering legacy sectors and setting a target for an increased share of manufacturing in GDP.

The budget has continued with a determined quest to reform tax administration in the face of bureaucratic sloth and intransigence. While commendable, this is not enough.

The macroeconomic and fiscal policy statements have no medium-term projections. The finance ministry thus has no official estimate or forecast of what GDP, sectoral shares, employment and India’s current account gap will look like in 2030. But the Cabinet and government hagiographers in the media and corporate sector wax eloquent about these things in 2047. This is braggadocio, not commentary on a forward-looking budget as some seem to think.

Why did the Indian stock market respond negatively to the budget? I do not think it was because of its admittedly pointless tinkering with the Securities Transaction Tax and retention of capital-gains taxes. Markets, like many of us, are seeking an official explanation for why prosperity remains muted, real wages are stagnant and employment prospects are weak even though our GDP growth and inflation numbers are so satisfactory.

If gains are to come in the future, then we were expecting a coherent narrative about how and when all the progress being highlighted will manifest in a tangible improvement in the prosperity of all Indians. But this was not on offer. Hence, the 2026-27 Union budget disappoints. We expected and deserved better.

The author is visiting senior fellow, ODI, London, distinguished fellow, Kautilya School of Public Policy, Hyderabad, and distinguished professor, GITAM, Hyderabad.