Nirmala's record budget, but what else?
The budget shows no sense of urgency or reassessment of priorities, persisting with profligate central expansion into state subjects instead of focusing on what only it can do
The budget disappoints. For the stock market collapse in the wake of the budget presentation, the increase in securities transaction tax rates is seen as the trigger. However, the real let-down is the failure to respond to what Canadian Prime Minister Mark Carney called a rupture in the global order, economic and political, and the challenges that flow from that rupture.
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Strategic autonomy has been key to India’s development strategy. Japan, South Korea, and Taiwan, for example, were happy to accept American diktat and the American nuclear umbrella and liberal access to the American market that came with it, after the end of World War II. India wanted to shape its own destiny. And forged the policy of non-alignment, to wrest concessions from either side waging the Cold War.
Navigating US-China dynamics
The world has changed dramatically since then. China is now the second most powerful economic and military power, presenting itself as America’s strategic rival. For the US and the rest of the world, India’s rise as a countervailing power in the Indo-Pacific is the surest way to keep China’s rise peaceful. It was acting on this logic that the US, under George Bush’s leadership, brought India out of the technology denial regime in which it had been placed after the nuclear tests of 1998. This, it did, by signing the Indo-US civilian nuclear agreement in 2008. Since then, India has acquired quasi-membership of the Nuclear Suppliers Group, and full membership of other technology regimes on missile technology, dual-use technology and materials, and on chemical weapons and precursor chemicals.
India has come to rely on the US for strategic support vis-à-vis China, which refuses to settle the border dispute with India, and does its best to keep India limited as a regional South Asian power, using its client state, Pakistan, as a force multiplier. India had been holding regular exercises with the US and other members of the Quadrilateral group, Japan and Australia. Donald Trump has rudely shaken up this cosy arrangement, not only by levying heavy tariffs on imports from India but also by cultivating Pakistan as a client.
Budget lacks strategic urgency
India is truly on its own, and has to build up its strategic muscle, including in advanced semiconductors and Artificial Intelligence, to acquire strength to defend and reinforce its strategic autonomy. That means allocating vastly more resources directly to defence, research and development, improving the quality of education at all levels, and building the advanced manufacturing capacity in vital sectors. To find the resources it needs, India has to abandon business-as-usual in budget-making and much else.
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The budget bears no reflection of the needed sense of urgency or reassessment of priorities. It persists with profligate central expansion into state subjects, instead of focusing on the things it alone can do.
Macroeconomic management is an obvious central responsibility. The budget has cut the fiscal deficit, meeting the 2025-26 target of 4.4% of GDP, and aiming for an even lower 4.3% of GDP for 2026-27. This would please credit rating agencies. It has also stepped up capital spending, its share in GDP going up from 3.06% of GDP to 3.11% of GDP — at least, that is what has been budgeted: in 2025-26, the actual capital expenditure fell short of the budgeted amount, to meet the overall fiscal deficit target.
Spending cuts bite hard
Total government expenditure has declined from 14% of GDP in 2024-25 to 13.9% of GDP in 2025-26 and 13.6% of GDP for 2026-27. Growth momentum has stalled, as indicated by the failure of the share of Gross Fixed Capital formation in GDP to rise above 30%, and the anaemic numbers reported by companies, which depress earnings per share in the stock market, never mind the 7% plus forecasts of economic growth. In such a situation, responsible budgeting would call for government expenditure to be at least 15% of GDP, even if that makes fiscal deficit hawks reach for a tablet of antacid. Instead of boosting overall demand in the economy by raising total expenditure, the government has chosen to squeeze spending, and hopes to distract people from noticing this by strewing scheme after support scheme across every plausible sector of the economy.
Talking big on MSME will not lower the cost of credit for small companies. For that, non-banking finance companies that lend to small businesses should be able to raise capital by issuing sub-prime bonds. For India to have a functional debt market, the first step is for Sebi to have unified control over both government and private debt, along with the full range of derivatives to hedge against interest rate, credit and currency risk. Does the budget accomplish this? Far from it.
Appearance over substance
The government has announced a number of new challenge funds, choosing to ignore the fact that past challenge funds have struggled to find takers. It offers big incentives for municipalities that issue bonds. How realistic is urban development financed by municipal bonds when municipalities do not have their own fiscal base, and are dependent on fiscal handouts by state governments?
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The budget did well to announce Rs 20,000 crore for carbon capture, use and storage. However, without any focused research on how to carry out carbon dioxide removal and how to convert the captured gas into useful products at an economic cost, what is the use of such budget announcements?
The development of Tier 2 and 3 towns is a good idea. An idea it will remain, unless states come forward to own and carry out such development.
In sum, the budget follows the entrenched pattern of appealing appearance standing in for substance in most areas of governance.
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