Union Budget 2026-27 – Macro Implications

1 Feb 2026 , 04:11 PM

FY26 – BE VERSUS RE AND WHAT IS THE DIRECTION

One of the best guidance notes to the Union Budget comes from the comparison of the Budget Estimates of FY26 with the Revised Estimates. Clearly, the government is falling short on net tax receipts as expected, and will cut spending in sync. Here are highlights.

• Overall net tax revenues to the centre for FY25-26 have been cut from ₹28.37 Trillion to ₹26.75 Trillion. This is due to lower-than-expected tax receipts in the year as of Jan-26.
• Among heads of receipts, non-tax revenues have been increased from ₹5.83 Trillion to ₹6.68 Trillion for FY26, while disinvestments have been cut from ₹47,000 Crore to ͅ₹33,837 Crore.
• As a result, the estimates of total receipts for FY26 have been reduced in the RE from ₹50.65 Trillion (including borrowings) to ₹49.65 Trillion.
• To offset the lower receipts, the revenue expenditure has been cut from ₹39.44 Trillion to ₹38.69 Trillion. The cut in capex spending is quite marginal at ₹10.96 Trillion.
• As a result of these cuts in spending, the government will still maintain the fiscal deficit at 4.4% of GDP for FY26 and the revenue deficit at 1.5% of GDP.

Let us now turn to the big highlights of the Union Budget 2026-27 announced today by Finance Minister, Nirmala Sitaraman.

CAPEX GETS A BOOST, ALBEIT NOT TOO MUCH

Ahead of the budget, there were demands for aggressive hike in government capex. The central capex has been raised ₹10.95 Trillion (RE) in FY26 to ₹12.20 Trillion in FY27. However, if you consider the overall capital spending of the centre, the states, and the public sector undertakings; it is estimated at ₹17.1 Trillion in FY27, and is a full 22% above the RE of FY26. But there is more.

• Government will set up an Infrastructure Risk Guarantee Fund to provide calibrated credit guarantees to lenders.
• Real estate holdings of central public sector enterprises (CPSE) will be effectively monetized through the special REITs route.
• The government will create an East-West freight corridor as well as 20 national waterways connecting critical mineral producing areas.
• It will launch a ship-repair ecosystem catering to inland waterways as well as launch a seaplane VGF scheme to indigenize manufacturing.

Let us now move to the fiscal consolidation moves of the government.

TOWARDS GREATER FISCAL RESPONSIBILITY

The government has accepted the recommendations of the 16th Finance Commission to retain the rate of vertical devolution at 41%. There will also be ₹1.40 Trillion as grants to states.

• For FY26, the fiscal deficit target of 4.4% is likely to be respected as the government has cut its spending in line with lower revenues.
• In addition, the central government has also guided for 4.3% fiscal deficit in the coming fiscal year FY27. This is slightly higher than the street expectation of 4.2%, but still appreciable.
• In addition, the centre will target Debt / GDP ratio of 50% by year 2030. In the current fiscal FY26, the debt GDP ratio stood at 56.1% and guided to reduce to 55.6% in FY27.

Let us finally look at defence and disinvestment

DEFENCE AND DISINVESTMENT – SLIGHTLY OFF TANGENT

Defence outlay grew by 15.2% from ₹6.81 Trillion in FY26 to ₹7.85 Trillion in FY27. Out of this allocation, nearly ₹3.12 Trillion goes towards maintenance spending of the defence forces, while around ₹2.19 Trillion is the capex allocation for defence, largely for procuring defence equipment from domestic manufacturers. The markets were expecting a substantial increase in defence allocation to take care of the increased geopolitical risk in the global economy and the recent standoffs we have seen between the US against Venezuela, Greenland, and Iran. However, 15.2% growth in defence allocation on yoy basis is still appreciable.

The disinvestment target has been raised to ₹80,000 Crore. This is rather surprising because in FY26, the government struggled to even reach its defence target of ₹47,000 Crore and is likely to close the year at under ₹34,000 Crore. Obviously, the government is counting heavily on the IDBI disinvestment to successfully go through in the fiscal year FY27. Otherwise, minority stake sales may not add up to much, as we have seen in the last two years.

The other estimate that caught the attention is the ₹3.16 Trillion that the government has estimated to come from RBI dividend. Even assuming that this includes the dividend paid out by PSU banks, we are looking at a substantial boost over the previous year. This will be the third year of a consistently elevated level of dividend payout by the RBI and the government needs to really weigh the pros and cons of such a move.

FINAL WORD ON THEME OF THE BUDGET

As the Finance Minister stated right at the beginning of her speech, the budget was built on 4 key intuitive targets for the economy.

• Ensuring macroeconomic stability
• Focusing on fiscal discipline
• Creating the ecosystem for sustained nominal growth
• Keeping moderated inflation for its multiple benefits for growth and consumption.

Towards that end, the budget seems to be a good step forward.

 

Summary The Union Budget was largely presented under fairly trying domestic and global macro circumstances. The government had the job of sustaining growth, without sacrificing fiscal discipline, something always easier said than done. The government, within its budgetary constraints, has tried to enhance allocation to defence and to capex. A lot will depend on how the private sector delivers as a follow-up. For the government, the numbers surely seem to add up for the coming fiscal FY27.