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Budget 2026‑27 Targets 4.3% Deficit, 50% Debt‑to‑GDP, Modest Capital Growth

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  • The budget presented on Sunday focuses on fiscal restraint after a slew of tax giveaways last year
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    The budget presented on Sunday focuses on fiscal restraint after a slew of tax giveaways last year (EPA) Source Full size
  • The budget has continued to lay emphasis on infrastructure-led capital expenditure
    Image: BBC
    The budget has continued to lay emphasis on infrastructure-led capital expenditure (Hindustan Times via Getty Images) Source Full size
  • The markets plunged because of a hike in the Security Transaction Tax
    Image: BBC
    The markets plunged because of a hike in the Security Transaction Tax (AFP via Getty Images) Source Full size

Budget Presentation and Fiscal Framework Finance Minister Nirmala Sitharaman delivered the Union Budget on 1 February 2026, setting a fiscal deficit of 4.3 % of GDP and gross borrowing of ₹17.2 trillion for FY 2026‑27 [8][6][7][11]. The government replaced the traditional deficit‑target with a debt‑to‑GDP ceiling of about 50 % to be achieved by 2031, allowing a higher debt ceiling than the previous 40 % limit [6]. Primary deficit is projected to fall to 0.7 % of GDP in FY 27, while overall deficit narrows slightly from 4.4 % to 4.3 % [6][11].

Capital Expenditure Targets and Growth Pace The budget raises centre‑run capex to ₹12.2 lakh crore (≈ 12.2 trillion rupees), roughly 3.1 % of GDP, continuing the shift toward infrastructure‑driven growth [7][9][4]. Since 2020‑21, capex’s share of total outlays has more than doubled, from 12 % to over 22 %, but the annual growth rate of capital spending slowed to 4.2 % in 2025‑26 and only modestly rebounds to 11.5 % in 2026‑27 [1][4]. Analysts note that despite higher headline numbers, the pace of new investment remains near‑static, raising questions about the multiplier impact [1][7].

Defence Budget Expansion and Domestic Procurement record ₹7,84,678 crore is allocated to defence, representing 14.7 % of total spending, with capital outlay rising to ₹2,19,306 crore (27.9 % of the defence budget) [3]. The increase follows Operation Sindoor 2025 and emphasizes replenishing precision‑guided munitions and institutionalising emergency procurement mechanisms [3]. Approximately 75 % of the capital funds are earmarked for Indian manufacturers under the Aatmanirbhar Bharat initiative, though concerns persist about public‑sector absorption capacity [3].

Rural Employment Scheme Funding and Transition Uncertainty The budget combines ₹95,692 crore for the new VB‑GRAMG programme with ₹30,000 crore for MGNREGS, claiming a 43 % increase over the previous year [5]. Activists argue the MGNREGS allocation lacks transparency regarding liability clearance, programme wind‑down, and state‑wise cost‑sharing, warning that the announced ₹125‑day work guarantee is financially untenable [5]. The NREGA Sangarsh Morcha highlighted the omission of any timeline or normative allocations in the Finance Minister’s speech, describing the transition plan as opaque [5].

Manufacturing, Technology Incentives and Execution Gaps New schemes boost seven strategic manufacturing sectors, including a ₹40,000 crore electronics component outlay, a second semiconductor mission, and a tax holiday for foreign cloud providers until 2047 [7][11]. Rare‑earth corridors are announced in four states, and container‑manufacturing and SME growth funds each receive ₹10,000 crore [7][9]. However, execution concerns surface: disinvestment revenue fell far short of the ₹47,000 crore target, and capital spending in 2025‑26 lagged its estimate, while e‑mobility schemes face cuts of over ₹3,700 crore due to under‑utilisation [10][7].

Sources

Timeline

Dec 30, 2025 – Prime Minister Narendra Modi convenes Finance Minister Nirmala Sitharaman, Niti Aayog leaders and leading economists to gather input for the upcoming Union Budget, signalling a consultative approach ahead of the February 1 presentation [12].

Jan 31, 2025 – The Economic Survey is tabled in Parliament, projecting FY 26 real GDP growth of 6.8‑7.2 % and noting average headline inflation of 1.7 % for April‑December 2025, setting the macro backdrop for the 2026‑27 budget [5].

2025 – Operation Sindoor, a four‑day aerial clash after the Pahalgam terror attack, prompts the government to institutionalise emergency procurement for precision‑guided munitions, shaping defence capital‑spending priorities in the FY 27 budget [3].

Jan 28, 2026 – Maharashtra Deputy Chief Minister Ajit Pawar dies in a plane crash near Baramati, Pune, an event that dominates national headlines just days before the budget rollout [5].

Feb 1, 2026 – Finance Minister Nirmala Sitharaman presents the Union Budget on a Sunday for the first time, outlining a fiscal deficit of 4.3 % of GDP, gross borrowing of ₹17.2 trn and a capital‑expenditure target of ₹12.2 lakh crore for FY 27, framing the plan as a “Viksit Bharat” vision to 2047 [10][9][4].

Feb 1, 2026 – The budget raises capital spending to ₹12.2 lakh crore, launches rare‑earth corridors in Odisha, Kerala, Andhra Pradesh and Tamil Nadu, and announces a new national waterway in Odisha linking Talcher to Paradip, underscoring infrastructure as a growth engine [4][1].

Feb 1, 2026 – A second semiconductor mission receives $436 m, a zero‑tax concession for foreign cloud providers extends to 2047, and mega‑textiles parks aim to boost exports under the recent India‑EU free‑trade agreement, reflecting a push into high‑tech and trade‑linked sectors [1][9][5].

Feb 1, 2026 – The Union Budget cuts funding for electric‑mobility schemes, slashing the PM E‑DRIVE allocation by ₹2,700 crore and the PM‑eBus Sewa allocation by ₹1,010 crore due to under‑utilisation, marking a shift toward fiscal prudence [8].

Feb 1, 2026 – The budget combines ₹95,692 crore for VB‑GRAMG and ₹30,000 crore for MGNREGS, claiming a 43 % increase, but activist Nikhil Dey warns “the MGNREGS allocation lacks clarity” and says states are left “in the dark” about funding shares [11].

Feb 2, 2026 – The fiscal framework pivots from a deficit target to a debt‑to‑GDP ratio of about 50 % by 2031, allowing a higher debt ceiling while modestly reducing the primary deficit to 0.7 % of GDP and cutting rural development spending to 1.2 % of GDP [7].

Feb 3, 2026 – Analysts note that capex now accounts for over 22 % of total outlays, yet youth NEET rates stall around 25 % and construction’s employment elasticity falls to 0.42, highlighting a dual economy where capital‑intensive firms drive growth but labour creation lags [6].

Feb 4, 2026 – Defence allocation reaches a record ₹7,84,678 crore, with capital outlay rising to ₹2,19,306 crore (27.9 % of the defence budget) to replenish precision‑guided munitions after Operation Sindoor, and 75 % of the capital funds earmarked for domestic industry under Aatmanirbhar Bharat [3].

Feb 4, 2026 – Opposition leaders Mallikarjun Kharge and Rahul Gandhi say “the budget fails the test of economic strategy” and label it anti‑people, while disinvestment revenue falls far short of the ₹47,000 crore target, raising doubts about execution capacity [9].

Feb 5, 2026 – The Union Budget highlights AI, biopharma, semiconductors and critical minerals as pillars of a “Viksit Bharat” by 2047, but low tax‑revenue buoyancy (overall 0.8) and a stalled deficit‑reduction pace threaten sustainable consolidation, with interest payments already consuming 40 % of revenue [2].

Future (by 2047) – The government aims to achieve “Viksit Bharat” status by the centenary year, leveraging the cloud‑tax holiday, semiconductor missions and rare‑earth corridors to position India as a high‑tech manufacturing hub, while targeting a debt‑to‑GDP ratio of 50 % ± 1 % by FY 2030‑31 [1][2][7].

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