Union Budget 2026-27: Can the three Kartavyas be realised?

For a country, which celebrates some sort of f Minor reforms include in filing returns and easing tax compliance on direct and indirect taxes, rejuvenating industrial clusters, high level committee on banking, municipal bonds, high powered education to employment committee towards services sector. Incentives include towards IT & ITeS sectors, safe harbour policies, etc.

Nudges include laying foundations for agglomeration of resource regions, cities, and other clusters for sustaining and accelerating growth through production and efficiency by maintaining the momentum of structural reforms, resilient financial sector and increased application of technology. Broadly, there are many minor policies (particularly concerning taxation), but collectively they intend to fix a much bigger ship.

A risky assumption here seems to be that private investment would crowd in. Risky because India’s recent experience speaks otherwise, investors have been jumping ships. This is evident looking at the figures- the share of public sector in total real GFCF increased from 21.6 per cent in 2021-22 to 25.1 per cent in 2023-24; while private sector real investment fell from 37 per cent to 34.4 per cent.

Apart from macroeconomic and global political concerns, there are three concerns we must weigh in to assess the success of the current budget proposals. First is to take a pragmatic assessment of the fiscal resources the Union has and the fiscal limits it set for itself. That is, given that the government has put a limit on its fiscal deficit at 4.3 per cent of GDP and the lower revised estimates of income tax, GST and the changes in the Union customs and excise, a careful assessment would be working within a reduced fiscal space. This is reflected in lower income tax and GST collections.

Further, the associated reduction in expenditure is reflected in reflected in lower RE (for 2025-26) towards capital expenditure, grants in aid for creation of capital assets, and reduction in Central Sector Schemes (CSS). Second, India’s expenditure on social services such as education, health and nutrition is low. It is true that much of social services expenditure is committed by the state governments.

Strictly speaking, it is not possible to get a better assessment of social services without taking in state governments’ spending. Nonetheless, the fall in CSS will have repercussions at the state level also, in curtailing spending towards associated schemes. This would most likely worsen when the tax cuts, exemptions, and concessions given by the Union government reduces the shareable pool, if Union’s policies fail to produce the desired outcomes.

This affects the government’s second kartavya (fulfil people’s aspirations and building capacity – i.e., measure which constitute to building aggregate demand). Third, relying on agglomeration economics is one thing, ensuring there are forward and backward linkages and contribution to local regions is another thing. That is, the type of capital expenditure matters. During 2024-25, nearly 22 per cent of the capital expenditure was towards defence services. Other capex such as towards roadways and highways connect cities and improve free flow of capital and skilled force.

However, spreading benefits require engagement with state and local governments. This has to come through informed consensus and faith in decentralisation measures, wherein the state and local governments being closer to the ground are better at responding on access to amenities, resources and the meaning of active participation of people (i.e., third kartavya).Broadly speaking, while Union government has an upper hand in strategizing supply side measures, it is the state and local governments which have a greater role in boosting capacity of aggregate demand.

The budget is strategic in its announcement with an intention to create growth in various sectors in the medium or long run. It also relies on many important outcomes, assumptions, and risks (possibly the government is aware of). Further, as the union government over the years reduced the spending on CSS and central schemes, it cannot be assumed that the Union budget is independent of state or local governments budgetary powers. Integration and success of the structural reforms lie in ensuring in coordinating with the state and local governments, it cannot be a one-way street.

(The writers are with Centre for Economic and Social Studies, Hyderabad)