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India's Union Budget 2026 is expected to play a critical role in strengthening the foundations for sustained medium-term growth by leveraging resilient domestic demand, sustaining public capital expenditure, and maintaining fiscal credibility, noted a report by EY India, titled "EY Economy Watch December 2025."
With global uncertainties persisting, the report underlines that "going forward, India may have to continue to rely on its resilient domestic demand to support growth," noting that domestic drivers remain the primary anchor as "the contribution of net exports to real GDP growth" is expected to remain negative in the near term. It adds that, alongside the RBI's accommodative stance, "one can look forward to a complementary growth push through the Union Budget for FY27." A key pillar of medium-term growth highlighted in the report is sustained public capital expenditure. It notes that "GoI's capital expenditure continued to show a strong growth of 32.4 per cent during April-October FY26," reflecting a frontloaded investment push. Emphasising the importance of continuity, the report states that medium-term growth prospects appear feasible "provided the fiscal policy emphasises a sustained momentum of GoI's capital expenditure growth in the range of 15-20 per cent on an annual basis" Such a strategy, it adds, would help "facilitate maintaining a robust medium-term growth profile with an average growth of 6.5 per cent". At the same time, the report stresses the need to balance growth with fiscal consolidation. It observes that while capital spending has been prioritised, the government has "successfully contained the growth of revenue expenditure to only 0.026 per cent during this period," helping preserve fiscal discipline. This approach, it notes, could enable adherence to "the budgeted targets of fiscal deficit and capital expenditure" despite revenue pressures. On the revenue front, the report points to subdued tax buoyancy, stating that "for 1HFY26 the GTR buoyancy is only 0.32 as against a budgeted buoyancy assumption of 1.1." It highlights that this reflects the impact of earlier tax reforms, including personal income tax and GST reduction, indicating that future revenue gains may need to come from structural improvements rather than rate hikes. Optimising expenditure efficiency is identified as another priority. The report underscores that a combination of front-loaded capital expenditure and revenue restraint has played a critical role in sustaining post-COVID growth momentum. It notes that periods of weaker growth coincided with "below trend growth of GoI's capital expenditure," highlighting its importance as a growth driver. Finally, the report highlighted that a stable macro-fiscal framework could strengthen the investment climate. It states that sustained public capex would be "further supported if domestic private investment growth also gathers momentum and global supply chain issues ease off" The Budget 2026 is expected to reinforce confidence by aligning growth support with fiscal consolidation, thereby strengthening the foundations for medium-term economic expansion. (ANI)
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