Budget moves forward with future as focus but ducks key reforms

Context & The Gist

The Union Budget 2026-27 is in the news for its continued focus on fiscal consolidation and increased capital expenditure, even amidst global economic uncertainties. The editorial argues that while the budget demonstrates prudence and a commitment to growth-stimulating spending, it sidesteps critical, yet politically challenging, reforms such as privatization and rationalizing subsidies. The government’s success in negotiating Free Trade Agreements (FTAs) is contrasted with its reluctance to implement similar decisive action on domestic economic and governance issues.

Essentially, the budget is seen as a cautious approach, prioritizing stability over bold reforms, and potentially missing an opportunity to address underlying structural issues hindering sustained economic growth and attracting foreign investment.

Key Arguments & Nuances

• Fiscal Prudence: The budget maintains a commitment to reducing the fiscal deficit and debt-to-GDP ratio, a positive trend considering the high levels reached during the COVID-19 pandemic.
• Increased Capex: Capital expenditure has more than doubled since 2020-21, indicating a shift towards investments that drive long-term growth.
• Manufacturing Push: The budget emphasizes scaling up domestic manufacturing in strategic sectors, aiming to reduce reliance on countries like China.
• Tax Simplification: Measures to reduce tax litigation and simplify transfer pricing rules are welcomed steps towards improving the ease of doing business.
• Missed Opportunity - Investment Sentiment: Raising the Securities Transaction Tax (STT) on futures and options was a misstep, negatively impacting market sentiment and contributing to foreign investor outflows.
• Lack of Disinvestment & Subsidy Reform: The budget lacks concrete proposals for aggressive disinvestment or rationalizing subsidies, despite recommendations from the Economic Survey and the Finance Commission.
• External Factors: The budget doesn’t adequately address concerns raised by foreign investors regarding India’s economic policies and investment climate.

UPSC Syllabus Relevance

• Indian Economy (GS Paper III): Fiscal policy, budgetary process, economic reforms, investment, and growth.
• Governance (GS Paper II): Government policies and interventions, issues related to planning, resource mobilization, and development.
• Polity and Governance (GS Paper II): Role of Finance Commission, Centre-State relations (regarding subsidy incentivization).

Prelims Data Bank

• Fiscal Deficit Target (2025-26): 4.4% of GDP
• Fiscal Deficit Target (2026-27): 4.3% of GDP
• Capital Expenditure (2020-21): Rs 4.26 lakh crore
• Capital Expenditure (2025-26): Rs 10.96 lakh crore
• Capital Expenditure (2026-27): Rs 12.21 lakh crore
• Combined Food & Fertilizer Subsidy (2025-26): Rs 4.15 lakh crore
• Finance Commission: A constitutional body formed by the President of India every five years to recommend the distribution of tax revenues between the Centre and the states.

Mains Critical Analysis

The budget presents a mixed picture. While commendable in its commitment to fiscal consolidation and increased capital expenditure, it falls short in addressing fundamental structural issues. A PESTLE analysis reveals the following:

• Political: The budget’s reluctance to undertake politically sensitive reforms (privatization, subsidy rationalization) suggests a prioritization of short-term political considerations over long-term economic gains.
• Economic: The focus on fiscal prudence and capex is positive, but the lack of measures to boost investment sentiment and attract foreign capital is a concern.
• Social: The absence of targeted measures to address pollution or improve social infrastructure is a notable omission.
• Technological: The emphasis on manufacturing in strategic sectors like semiconductors is a step in the right direction, but requires sustained investment and policy support.
• Legal: Simplification of tax litigation processes is a positive legal reform.
• Environmental: The budget lacks significant environmental initiatives, despite growing concerns about pollution and climate change.

The core issue is a critical gap between policy intent and implementation. The government has demonstrated the ability to negotiate FTAs, but struggles to replicate that decisiveness in domestic reforms. This hesitancy stems from political constraints and a fear of alienating key constituencies. The implications include continued reliance on subsidies, slower economic growth, and a potential loss of investor confidence.

Value Addition

• Finance Commission (16th): Headed by Arvind Panagariya, the 16th Finance Commission is currently examining the fiscal position of the Union and States and making recommendations on the distribution of tax revenues.
• Economic Survey 2025-26: Highlighted concerns about sluggish private investment, weak exports, and foreign investor outflows, issues largely unaddressed in the budget.
• FTA Successes: India has recently signed FTAs with the EU, UK, and Australia, demonstrating its growing economic influence and negotiating prowess.

Context & Linkages

This article reinforces the assessment of the budget as prioritizing prudence and sectoral measures over large-scale reforms. It highlights the continued emphasis on manufacturing and infrastructure development, aligning with the current budget’s focus on capital expenditure. Both articles acknowledge the absence of bold reforms like privatization and subsidy rationalization.

The Economic Survey’s identification of sluggish consumption, weak exports, and foreign investor outflows provides crucial context for understanding the budget’s shortcomings. The budget’s failure to address these concerns, as highlighted in the Survey, represents a missed opportunity to boost economic growth and attract investment.

The Way Forward

• Prioritize Reforms: The government must prioritize politically difficult but economically necessary reforms, such as privatization of PSUs and rationalization of subsidies.
• Attract Investment: Implement policies to improve the investment climate and attract foreign capital, addressing concerns raised in the Economic Survey.
• Fiscal Discipline: Maintain fiscal discipline and continue to reduce the fiscal deficit and debt-to-GDP ratio.
• Address Structural Issues: Focus on addressing underlying structural issues, such as improving infrastructure, enhancing education and skills, and promoting innovation.
• Long-Term Vision: Develop a long-term vision for economic development that prioritizes sustainable and inclusive growth.