Calibrated moves

The budget for next fiscal aims to support economic growth through a combination of steady capital expenditure and consumption boost, while tightening the fiscal belt. 

Fiscal deficit is budgeted to reduce to 4.4% of GDP, down from 4.8% in the current fiscal, with a focus on reducing revenue expenditure.

Capital expenditure remains at 3.1% of GDP, while the effective capital expenditure, including budgetary and internal and extra-budgetary resources, increases to 5.5% of GDP to lift the domestic economy and crowd-in private capex. 

At Rs 11.2 lakh crore the allocation for capital expenditure in fiscal 2026 marks a 10% increase on-year. This is expected to support the growth of infrastructure sectors such as roads, railways, and urban development.

Additionally, the government has allocated Rs 4.27 lakh crore for grants-in-aid for creation of capital assets, which is a 42.4% increase over the previous year. 

The budget has provided tax relief to the middle class by increasing the tax exemption limit to Rs 12 lakh from Rs 7 lakh. This is expected to benefit 72% of income taxpayers and provide a boost to consumption.

The tax relief is expected to result in tax savings of Rs 80,000 annually for individuals earning up to Rs 12.75 lakh (including standard deduction of Rs 75,000) to support middle-class consumption and boost economic growth.

A normal monsoon, healthy farm incomes, and government support are expected to drive a GDP growth rate of 6.5% for the next fiscal year.

The government has shifted its fiscal anchor from fiscal deficit to debt-GDP ratio, aiming to reduce the central government debt to 50% of GDP by fiscal 2031.

The budget provides a mix of fiscal support through capex and subsidies to facilitate green transition and reduce carbon intensity. However, there are risks to the budget math, including a potential slowdown in economic growth, geopolitical uncertainties, and demand-supply mismatches.

The government's commitment to reducing the debt-GDP ratio and maintaining fiscal discipline will be essential in achieving its economic goals and ensuring long-term sustainability. The government's ability to implement its plans and navigate the risks and challenges ahead will be
crucial to its success.