Jayanta Roy Chowdhury
New Delhi, Jan 31 (.) When Finance Minister Nirmala Sitharaman rises in Parliament on Sunday to present India’s Budget for 2026–27, her speech will arrive at a crucial juncture. In the face of global headwinds, she will need to come up with a ‘smart’ reforms spurt to push India’s growth story, but rising public debt will mean Sitharaman will also have to signal intent to consolidate the country’s ever-increasing spending.
Politically, this is perhaps the best time to push the reforms agenda. It’s been two years since the NDA government has come back to power through a Parliamentary election, and despite the needs to play to the gallery ahead of elections to two states which the BJP’s electoral Juggernaut has not been able to conquer, West Bengal and Tamil Nadu, it is also the best time to take risks with reforms: As the next general election is three years away.
That reform burst is of course also a must, if North Bloc’s Mandarins wish to push the country’s GDP to grow by the projected 6.8 and 7.2 per cent, despite the fact that the larger global economy remains buffeted by protectionist tariffs, and geopolitical friction. India’s exports in both goods and services, which account for over a fifth of the GDP, will remain at risk regardless of the number of FTAs it signs.
However, to raise finances for that growth story, India needs to interest investors and global rating agencies, who are looking at the longer term. Which means after increasing its spending way beyond the Indian state’s capacity through the Covid years, it now needs to reinforce ‘baby steps’ towards a much-needed era of fiscal consolidation to check a slowly but steadily expanding public debt, which now stands at nearly 56 per cent of India’s GDP.
At the heart of the spending spree has been capital expenditure on India’s roads, railways, ports and airports. In the last dozen years, the Centre’s budget has relied heavily on expanding capital spending, raising it from just 1.6 per cent of GDP in 2014-15 to 3.1 per cent of GDP in the 2025-26 budget.
Will India then roll back its capital spending? Unlikely. ‘Sarak, Bijli, Pani’ (roads, electricity and water) have always been vote getters and the push for expanding and improving them will remain, but with riders and perhaps with more private participation so as not to stretch the Centre’s finances beyond a point.
Fiscal policy will possibly focus on a credible roadmap to reduce the debt-to-GDP ratio, targeting a deficit of around 4.2 cent in the coming financial year and 4 per cent or below in the year after, even as public capital expenditure in infrastructure, logistics and manufacturing, continues.
Reforms will be more ‘smart’ in nature than sweeping changes of the sort that Manmohan Singh, Yashwant Sinha, P Chidambaram or even Arun Jaitley brought in. At the macro level, only marginal tweaks are being expected in income tax slabs, with greater emphasis on simplifying compliance and perhaps introducing joint taxation for married couples, though this has its critics.
From the industry, there is a growing pressure to simplify the sprawling system of tax deducted at source. Consolidating dozens of rates, which serve to confuse, into just three or four broad categories and exempting business-to-business payments, which are already covered by GST, would possibly reduce compliance costs for firms that complain of an overlapping tax regime trap.
Small businesses, long termed the “backbone of the economy”, may receive targeted incentives through a second round of deregulation, better access to export credit and modest tax relief under presumptive taxation schemes, helping them grow with fewer worries.
The defining feature of Budget 2026, however, is expected to be its strong tilt toward new technologies and green growth. Targeted tax incentives for artificial intelligence, robotics, data centres and high-performance computing are possibly on the cards.
India needs to be positioned as a global digital and innovation hub. Funnelling investments into the cutting-edge areas of cybersecurity, cloud infrastructure and fintech can be the ‘Mantra’ to strengthen the digital economy.
Green technology has already emerged as a major pillar. Higher budgetary allocations and tax breaks for renewable energy, battery storage systems, green hydrogen and grid modernisation will support India’s target of 500 GW of non-fossil capacity by 2030. Climate-smart agriculture, EV manufacturing, battery localisation and clean mobility infrastructure are expected to continue getting policy and fiscal backing.
Employment has always been the most politically sensitive theme of the budget. More so in recent years as industrial obsolescence and AI may deliver a “jobs shock”. The government has been trying for years to implement four sweeping labour codes that seek to harmonise wages, industrial relations and social security across states. Their adoption, particularly a rule that defines basic pay as at least 50 percent of wages, would expand formal-sector protections and could generate millions of jobs over time.
On the social sector front, the budget is expected to deepen welfare schemes for informal and urban workers. Extending health insurance under Ayushman Bharat to gig workers, expanding subsidised loans for first-time entrepreneurs, especially women and marginalised groups, and rolling out low-limit credit cards for micro and small firms could reinforce the social net the state wants to roll out. At the same time new health challenges posed by “digital addiction” and obesity will also need to be tackled.
Defence spending, given the imperatives of a renewed clash with Pakistan last year, the crumbling of a rules-based global order and the emergence of a rougher neighbourhood, will have to go up substantially. Especially so as the wishlist of India’s general and admirals is long and the arms bazaar now wants to enter India through investments in defence industrial complexes.
All in all, the tone and substance of the 2026–27 budget is likely to be incremental rather than transformative, fiscally cautious yet investment-heavy. The upcoming budget will not, by itself, resolve India’s structural challenges of employment, inequality and productivity, but will walk the path towards a it. . JRC .
