A Budget boxed in by fiscal arithmetic

EVERY Union Budget is, first, a constitutional ritual. The government cannot spend a rupee without Parliament’s consent; the Budget is the annual moment when citizens (through their elected representatives) authorise the executive to tax, borrow and spend. That is why budgets invite outsized expectations. This year, those expectations have been even louder: with the US administration’s unpredictable tariff actions rattling global trade, many commentators have called for a “1991 moment” — a big-bang reset.

But the truth is less dramatic and more sobering. India’s room for manoeuvre is limited not by lack of imagination, but by the hard constraints of fiscal arithmetic. And that is the right place to begin any serious evaluation of Finance Minister Nirmala Sitharaman’s record ninth consecutive Budget.

Ask most households what they want from the Budget and you’ll hear a familiar refrain: lower taxes. Yet India’s tax-to-GDP ratio is only around 20% — far below Germany’s nearly 35% and other European economies. Those higher ratios, crucially, finance universal social security systems. India does not offer that breadth of coverage. The uncomfortable implication is this: we want European-quality public services with a much narrower tax base.

The narrowness is not anecdotal. The Economic Survey (2017) famously noted that India has only about seven income-tax payers per 100 voters. That single statistic should shape Budget debates more than any rhetorical flourish. In a democracy of 1.4 billion people, a small sliver is carrying the direct-tax burden — while the majority expects visible public goods and welfare support. There is a genuine fairness issue here, but also a basic feasibility constraint.

It is true that the burden of indirect taxes such as GST is more widespread. But indirect taxes, although easier to collect, are inherently regressive and hurt the poor much more in relative terms, than the rich.

On the expenditure side of the Budget, we find that a large fraction of spending is effectively pre-committed: interest payments, salaries, pensions and major subsidies (food and fertiliser). That leaves a relatively small slice for the growth-promoting portion i.e. capital expenditure. Much of the growth momentum in recent years has come increasingly from publicly funded capex, which was raised again in this budget to Rs 12.2 lakh crore out of the total outlay of Rs 53.5 lakh crore. Overall spending rises by only about 7%, which means that the FM is trying to protect investment spending even while keeping total spending growth contained. This implies that there isn’t much discretionary fat left to trim or reallocate. So any call for sweeping tax cuts, large new welfare promises and big new sectoral packages collides with arithmetic.

On the deficit, the government has stayed close to its medium-term promise: fiscal deficit ratios of around 4.4% and 4.3% (this year and next) are broadly aligned with the glide path announced earlier. In today’s global environment, that discipline matters: credibility helps keep risk premia down for dollar loans and stabilises expectations. For the next year, the combined borrowing needs of the Centre and states are massive, and hence interest rates won’t come down despite heroic monetary easing by the Reserve Bank of India. If rates stay high and sticky, private investors postpone capacity expansion. When the cost of capital remains high, even a well-intentioned public capex push struggles to “crowd in” private investment.

Budgets also reveal the government’s beliefs about future revenues. This financial year, tax revenue till November has only grown at 3.3%, much below projections of the 2025-26 Budget. When tax buoyancy undershoots, governments typically respond by compressing expenditure — often by cutting healthcare or education spending, or delaying capex because it is the easiest line item to squeeze without immediate political backlash. Fiscal discipline is maintained but by sacrificing growth impulse.

The Budget has caught the global fashion of industrial policy: sectoral thrusts, targeted incentives and “strategic” bets (biopharma, electronics, frontier manufacturing). The world is indeed picking winners. But India’s experience suggests that picking winners works only when the ecosystem is built: logistics, standards, testing labs, contract enforcement, skilled technicians, predictable regulation and patient finance. Production-linked incentives have worked only for some sectors.

The better way is to invest in the fundamentals that raise productivity across sectors: reliable power, ports and freight, dispute resolution, ease of exit, and a deep domestic bond market. Without these, industrial policy risks becoming only a carousel of announcements.

One welcome feature of this Budget’s narrative is the ambition to capture 10% of the global market for tradeable services — explicitly including tourism, healthcare and medical tourism, creative content and design, alongside IT. This is a sound strategic horizon. India’s comparative advantage lies increasingly in services, and services exports can absorb skilled labour at scale. This will require relentless follow-through with standards, visas and connectivity for tourism; accreditation and trust for healthcare; and, above all, a massive, continuous pipeline of skill formation.

Where the Budget does well is also in the architecture for MSMEs. Working capital constraints and payment delays are silent killers of small firms. Strengthening bill discounting through TReDS (Trade Receivables Discounting System) — and making it the settlement platform for purchases from MSMEs by CPSEs (Central Public Sector Enterprises) — directly targets liquidity stress where it hurts most. One missed opportunity was to link GST invoicing/filing with UDYAM registration to automatically penalise chronic payment delays. This reform would have improved trust and cash flow without large fiscal cost.

One troubling omission is in not engaging with a central structural problem: the workforce share in agriculture remains high — and in some measures appears to be rising — even as agriculture’s GDP share declines. That is the signature of distress, not transformation. Rural wages have stagnated for long. The non-farm economy has not created enough secure jobs to pull labour out of low-productivity agriculture. A Budget cannot speak of Viksit Bharat without addressing this employment paradox. At the same time, the proxy for unemployment insurance i.e. the rights-based employment guarantee Act (MGNREGA) has been replaced by the Budget-constrained VB-G-RAM-G, in which 40% of the burden will now be on state finances.

Finally, it is worth pondering whether the annual Budget presentation ought to get this festive IPL-like status. Should it not just be a routine, almost boring affair, like in most developed economies? The FM could use Budget day to deliver a candid ‘State of the Economy’ speech and set long-term goals. Some of the recent big economic reforms, such as the corporate tax cut of 2019, have happened outside the Budget.

All said and done, this is a Budget of cautious pragmatism, and so unanswered questions. Its fiscal stance is defensible: with limited fireworks, conservative signalling and continued capex support. There is emphasis on skills and capability-building for the future. There is a bold ambition on services exports. But there was no engagement with some pressing realities: wage stagnation, rural distress, the stubborn agricultural workforce share, the sliding rupee, the drying up of net inbound FDI and rising inequality.