By conventional macroeconomic yardsticks, India should enter the FY27 Budget cycle with a degree of comfort. Growth is expected to remain above 7%, inflation has eased from its post-pandemic peaks, and fiscal consolidation appears broadly on track, with the fiscal deficit projected to narrow to around 4.4% of GDP. On the surface, in a slowing global environment, the economy looks resilient.
Yet budgets are not written for periods of comfort; they are crafted to anticipate stress. Beneath reassuring aggregates lie deep structural pressures that the Budget cannot afford to overlook—weak household savings, skewed public expenditure, a hesitant manufacturing sector, fragile private investment, external trade risks, and a farm economy mired in low productivity. Stability, in short, risks masking stagnation.
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India’s recent revenue performance has benefited from buoyant indirect taxes, improved compliance, and steady nominal growth. Yet the quality of revenue is critical. Net household financial savings fell sharply to approximately 5.2% of GDP in FY24, one of the lowest levels in decades, as household indebtedness rose. This pattern suggests that tax buoyancy has been sustained in part by households consuming more and saving less. Such a fiscal base is inherently fragile. An economy can not indefinitely extract revenue from households whose financial buffers are shrinking. The FY27 Budget must, therefore, be cautious about over-reliance on consumption-led revenues and should seek to broaden the tax base—not by deeper penetration into already-stretched household finances, but through formal employment growth and productive investment.
Public expenditure has leaned heavily on capital outlays since FY21, with central capital expenditure now exceeding Rs 11 lakh crore. This emphasis has helped stabilise growth and strengthen physical infrastructure. However, the composition of spending reveals a growing imbalance. Investment in human capital—education, skills, health, and research—lags badly. Education spending has stagnated aat round 3% of GDP, teacher vacancies remain unfilled, and learning outcomes continue to disappoint. R&D spending has stagnated near 0.7% of GDP, far below thresholds typical of innovation-driven economies. Infrastructure without corresponding investment in human capital risks creating assets the economy cannot fully utilise, weakening long-term returns on public investment.
In advance of the Budget’s presentation on 1 February, the government has raised the GST rate on pan masala, cigarettes, tobacco and similar products to 40%. In addition, the railways raised fares twice during the year, yielding about Rs 3,900 crore against a prior surplus of Rs 2,517.38 crore in 2022–23. These moves aim to support revenue and contain the deficit, as the IMF has flagged a potential “revenue squeeze” in the central budget.
Manufacturing remains a weak link in India’s growth, with capacity utilisation still below levels needed to spur large-scale private investment and core in dustrial demand softening. While Production-Linked Incentive (PLI) schemes have attracted nearly Rs 2 lakh crore in realised investments and generated over 12.6 lakh jobs, they cannot substitute for a broad revival on their own. Recent PMI data show India’s factory activity cooling, with new orders and output growth slowing to multi-month lows.
The global environment adds further complexity. India cannot assume benign access to the US market in FY27 and beyond. At the same time, a slew of free trade agreements (FTAs) has delivered only modest export gains, and many have widened trade deficits without significantly boosting value-added exports—reflecting weaknesses in domestic competitiveness rather than market access alone.
Agriculture still employs nearly half the workforce while contributing less than a fifth of GDP. Productivity remains low, incomes are volatile, and climate risks are rising. Bud getary support continues to be skewed toward subsidies rather than investment in irrigation, storage, crop diversification, and agro-processing. Recent changes to rural employment schemes and procurement policies risk weakening income buffers without offering sus tainable alternatives. The FY27 Budget must tread carefully: weak farm incomes directly af fect consumption, savings, and broader economic stability.
Despite improvements in Direct Benefit Transfer (DBT) targeting, vulnerability remains high. Health shocks, income volatility, and inadequate insurance continue to suppress household savings and risk-taking. An economy that seeks higher investment cannot leave households one illness away from financial distress.
The central question for the Budget is not whether India can maintain stability—it likely can. The real challenge is whether it can convert that stability into sustained, broad-based growth. Achieving this will require hard choices: redirecting expenditure toward productivity, addressing institutional frictions that deter private investment, preparing for external trade shocks, and confronting long-neglected sectors like agriculture and human capital. India does not face a fiscal crisis. But it does face an institutional test.
