India’s Upcoming Budget: A Tightrope Walk Between Fiscal Prudence and Growth
India’s economic landscape is currently a complex mix of slowing growth, weak domestic demand, and global uncertainties. As Finance Minister Nirmala Sitharaman prepares to present the annual budget on February 1st, 2026, the nation watches closely to see how the government will balance the need for fiscal responsibility with the imperative to stimulate economic activity. Experts predict a budget focused on deficit reduction, rather than a large-scale stimulus package, a decision that reflects the government’s commitment to fiscal consolidation and its bid for a credit rating upgrade, but also risks further slowing growth in the short-term.
Key Takeaways:
- Fiscal Deficit Reduction: The government is likely to prioritize lowering the fiscal deficit target, potentially to 4.4% of GDP for FY2026, from 4.9% in the current fiscal year.
- Nominal GDP Growth Target: Experts project a 10.5% nominal GDP growth target for FY2026.
- Emphasis on Job Creation: The budget will likely focus on job growth in the labor-intensive manufacturing sector, along with continued investment in infrastructure.
- Targeted Tax Relief: While a broad-based tax cut is unlikely, some targeted tax relief, potentially for middle-income households, is on the cards.
- Slowing Growth and Monetary Policy Tightrope: The budget comes against a backdrop of slowing economic growth and a central bank grappling with managing inflation while potentially needing to ease monetary policy to stimulate the economy.
Deficit Focus: A Balancing Act
After reaching 9.2% of GDP during the pandemic, India’s fiscal deficit has been steadily declining. This reduction is crucial for achieving a coveted credit rating upgrade. S&P Global Ratings recently upgraded India’s sovereign rating outlook to “positive,” but the country remains at the lowest investment grade level (“BBB-“). The finance minister, in her July 2024 budget speech, expressed a commitment to narrowing the deficit to 4.9% in FY2025 and 4.5% in FY2026. “From 2026-27 onwards, our endeavor will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP,” she stated. Achieving this target will partially rely on continued fiscal discipline and potentially further reduced government spending.
Government Spending Shortfalls:
Over the past seven years, the Indian government consistently underutilized its budgeted expenditure, averaging around 80% utilization each year, according to Goldman Sachs. While this shortfall narrowed post-pandemic due to increased subsidy spending, projections suggest a further contraction in public expenditure in the coming years, slowing to 3.2% of GDP in FY2026. This fiscal discipline, while enhancing the nation’s fiscal health, is predicted to act as a drag on GDP growth in the upcoming fiscal year.
Economic Slowdown: Addressing the Challenges
India’s economy, once the fastest-growing major economy globally, has experienced a significant slowdown. Growth figures for the quarter ending September 2025 missed expectations, registering a mere 5.4% increase – the slowest expansion in nearly two years. Consequently, the government has revised its overall growth outlook for FY2025 downward to 6.4% — a four-year low. Various factors contribute to this slowdown, including unseasonal rainfall, previous fiscal tightening by the Reserve Bank of India (RBI), and sluggish private sector credit growth. This slower-than-anticipated economic performance necessitates a carefully calibrated response within the upcoming budget.
Expectations for FY2026:
While hopes remain for a substantial fiscal stimulus package to revive the economy, analysts like Shilan Shah of Capital Economics predict only piecemeal measures. This includes potential, but relatively small, “accommodative tax and spending measures”; a large-scale spending initiative is deemed unlikely. Nomura analysts forecast a nominal GDP growth target of 10.3% for FY2026, a modest increase from the current year’s projection.
Monetary Easing: A Delicate Balancing Act
The Reserve Bank of India (RBI) has maintained a steady interest rate since February 2023. However, the deeper-than-expected economic slowdown complicates the central bank’s position. A cut in policy rates, especially with the rupee hitting record lows against the dollar, risks exacerbating inflation and potentially triggering capital outflows. While inflation has eased to 5.22% in December and 5.48% in November (after exceeding 6%), falling within the RBI’s tolerance band, this still necessitates caution.
RBI’s Dilemma and External Factors:
The RBI faces a difficult choice between stimulating growth through rate cuts and controlling inflation. Analysts at UBS predict a “shallow monetary easing cycle” of about 75 basis points, potentially starting with the February 2026 policy meeting. However, the RBI’s recent statements suggest a continued cautious approach. The possibility of new tariffs imposed by the US under President Trump’s administration adds another layer of complexity, potentially impacting the decision-making process of the RBI and other Asian central banks in managing currency fluctuations and growth vs. inflation.
Disinvestment Goal: Revised Targets
Another key aspect of the upcoming budget is the government’s disinvestment program—selling stakes in state-owned enterprises. Reports suggest a potential 40% reduction in the disinvestment and asset monetization targets for FY2025, dropping to less than 300 billion rupees ($3.47 billion) from the initial 500 billion rupees target. This revision reflects the challenges faced in achieving the initial ambitious goal. Analysts anticipate a similarly adjusted, lowered target for the following fiscal year.