The Budget has maintained continuity by focusing on capex, with a moderate increase in overall spending. That will further buttress macroeconomic stability by sustaining the current economic growth momentum, which received a fillip from coordinated policy stimulus this year.
Longer-term policy priorities of accelerating and sustaining growth, skill development with capacity building and inclusive growth have guided the key initiatives announced by the Finance Minister.
A comprehensive review of banking system regulations continued focus on transport and logistics infrastructure, capital and liquidity support to MSMEs, budgetary support for strategic sectors in manufacturing and services and initiatives aimed at skill development are expected to enhance factor productivity and long-term potential growth.
Total Budget spending at 13.6 per cent of GDP is budgeted to grow at 7.7 per cent year-on-year over the revised estimates of the current year, with capex growth of 11.5 per cent exceeding revenue spending growth of 6.6 per cent.
Nominal GDP growth is estimated at 10 per cent versus 8 per cent in FY26.
Thus, the post-pandemic trend of maintaining expenditure growth below nominal GDP growth continues, driven by moderate revenue spending growth.
The quality of spending has also been maintained, with capex around 3.1 per cent of GDP. Higher public capex, along with increased support to states through long-term loans, should help sustain investment growth in the next fiscal year and support higher potential growth.
On the financing side, the tax code is largely unchanged, providing much-needed tax policy stability. The implementation of the new Income Tax Act from the next financial year aims to simplify compliance.
The tax-to-GDP ratio for FY27 is pegged at 11.2 per cent lower than 11.4 pe cent in the FY26 revised estimates, reflecting GST rationalisation and lower tax elasticity to nominal GDP.
Gross tax revenue growth in FY27 BE is pegged at 8 per cent over FY26 RE, with direct taxes expected to grow faster than indirect taxes, reflecting progressivity in the taxation structure.
Non-tax revenue is set to receive a boost from RBI and CPSE dividends in FY27 too, though after a 14.5 per cent y-o-y increase in FY26, growth this year is expected to be flat. Non-tax revenue as a percentage of GDP is pegged at 1.7 per cent.
Among notable measures, the tax break given to foreign company owned data centres to provide cloud computing services with domestic participation will help meet the needs of India’s rapidly growing digital economy.
In line with global practice, share buybacks will be taxed as per the LTCG regime, which may encourage private investments. An increase in the STT rate on futures and options has hurt the market sentiment, though.
In Centre-State fiscal tax devolution, the States’ share of total taxes has been kept at 41 per cent for five years in line with the 16th Finance Commission’s recommendations.
While States’ share of total taxes is slated to increase by 9.5 per cent in FY27, it remains unchanged at 3.9 per cent of GDP, the same level as in FY26. Finances at a subnational level have been under strain in recent years, and State government market borrowings have emerged as a major source of upward pressure on rates and spreads over the H2FY26.
While grants to States suggested by the Finance Commission will help finance revenue deficit, an unchanged share in the divisible pool of taxes is a signal for states to shore up their own sources of revenue and follow fiscal discipline.
Fiscal consolidation through a medium-term debt-to-GDP target of 50 per cent by March 2031 gives flexibility to pursue countercyclical fiscal support if the need arises in a challenging external environment, while still pursuing overall consolidation.
Debt to GDP target for FY27 at 55.6 per cent versus 56.1 per cent in FY26RE, while fiscal deficit is pegged at 4.3 per cent versus 4.4 per cent in FY26. Primary deficit at 0.7 per cent of GDP versus 0.8 per cent in FY26 is also largely unchanged.
Fiscal consolidation would thus be achieved through higher nominal GDP growth and a marginally lower primary deficit. The revenue-to-fiscal deficit ratio indicates that a larger part of the fiscal deficit will continue to finance government capex, which should support growth.
To finance the fiscal deficit, gross market borrowings are placed at ₹17.2 lakh crore and net borrowings at ₹11.7 lakh crore, with net market borrowings financing 69 per cent of the fiscal deficit compared to 73 per cent in FY26. Borrowings, particularly gross borrowings, are higher than market expectations and are likely to keep pressure on sovereign bond yields and market rates.
Thus, general government financing requirements will remain large, even as demand from the banking system for government bonds moderates amid slower deposit mobilisation and rising credit demand.
With the monetary policy easing cycle nearing its end, demand is being dented further. Bond buying by the RBI through OMOs will be needed to keep rates from rising, and easy financial conditions will persist until net capital inflows pick up. Higher investment limits for persons residing outside India in listed equities aim to support FPI inflows.
Overall, the Budget does well to maintain continuity and policy stability going forward, while outlining the priorities of the government over the long run.
The author is Managing Director and CEO, IndusInd Bank.
Published on February 1, 2026