What Does Budget Mean: Financial

Where does the budget stand in terms of its revenue math? This question is best addressed by examining three factors: the exogenous variable of nominal GDP growth, the incidence of tax inflation, and the quality of spending rather than just its quantitative effect.

Union Finance Minister Nirmala Sitharaman during a press conference after presenting the Union Budget 2026-27 at the National Media Center in New Delhi. (Photo by Arvind Yadav/Hindustan Times) (Hindustan Times)The most important estimate is inflation, which will increase slightly in terms of how it affects the GDP deflator relative to household budgets. It was a mere 0.6 percentage points in 2025-26 and is expected to be in the range of 2.8%-3.2% in 2026-27 if the Economic Survey’s real growth estimate of 6.8%-7.2% and the Budget’s nominal growth estimate of 10% are read together. That’s not an unreasonable assumption given how things stand at the moment. However, the importance of nominal growth will be crucial for the budget, not just this year, but even in the medium term as debt trajectories and one-off fiscal deficits will no longer be important markers of fiscal prudence.

This was best explained in a note issued by JPMorgan’s Chief India Economist Sajid Chinoy on 28 January. “If nominal GDP growth averages 10% over the next 5 years, the Center will have to reduce its deficit from 4.4% of GDP in FY26 to 3.6% of GDP in FY31. Consolidation over five years is not a particularly difficult task, the primary deficit (which the Center controls) will have to be halved (0.4% of GDP) as interest payments/GDP will decline over time… If nominal GDP Growth is fixed at 9%, which will reduce central finance by 30% of ?GDP, requiring a large 1.4% of GDP…the primary deficit will need to be mostly consolidated, reducing 1% of GDP over the next five years,” it said.

To be fair to the government, it can do little to influence or predict nominal growth up to 2030-31 and will have to take it as it comes. What can be said is that in the current environment the government has barred fiscal prudence for itself by adopting debt rather than deficit as the guide for fiscal policy.

Now come to the question of tax boom. It is the change in tax revenue per unit of GDP. A higher tax boom means the same level of growth and increased budget space for deficits, and a fall in this leads to a fiscal squeeze. The Budget is very conservative in this calculation and estimates an overall tax increase of only 0.8 between the 2025-26 Revised Estimates (RE) and 2026-27 Budget Estimates (BE) numbers.

This, in a way, reflects the impact of major reductions in income tax and GST rates last year. What followed, on expected lines, was a slight decline in the tax-GDP ratio as seen in the Union Budget. It was 11.5% in 2023-24 and 2024-25, fell to 11.4% in 2025-26 RE data and is expected to fall to 11.2% in 2026-27.

To be sure, tax inflation estimates are different for direct and indirect taxes. “In fiscal math for FY27, direct taxes are likely to grow faster than nominal GDP growth (tax buoyancy of more than 1). Indirect taxes are expected to grow at a much slower pace led by the recent reduction in GST tax rates,” HSBC Chief India Economist Bihandari Pranjal issued on Sunday.

This can also be seen in the tax-GDP ratio for direct and indirect taxes. This is 6.9% and 4.3% for direct and indirect taxes in 2026-27 BE numbers, the highest and lowest since 2017-18 where the budget compares them at a glance. Looked at another way, it also rules out any major tax relief in the near term.

What is the question of financial balance as far as quality of expenditure is concerned? About one-third of total budget expenditure (32% to be precise) is now contributing to effective capex which now stands at 4.4% of GDP. In terms of share of total budget expenditure, this share was less than 20% till 2020-21. Even the amount expressly designated as capital expenditure, if a grant-in-aid fund is excluded, has more than doubled from 1.5% to 3.1% of GDP between 2017-18 and 2026-27. The increase in capital expenditure has been made possible by a large reduction in revenue expenditure, excluding interest payments, over the past few years. It has come down from 10.2% of GDP in 2021-22 to 6.9% in 2026-27 BE numbers.

A commitment to fiscal prudence rather than prioritizing capital spending has become a defining feature of the current government’s budget in the post-pandemic era. It is only on this commitment that the tax boom continues despite the decline.

Whether this strategy will bring the desired rewards now depends on the impact of China’s excess capacity on global inflation (and hence nominal GDP growth) and the economic survey’s recognition that fiscal prudence is now only necessary and to automatically unlock previous govt. Although not a sufficient condition, through the channel will depend on external variables. Be that as it may, the budget scores as far as revenue is consistent.