Despite tighter fiscal headroom, the government has largely stayed the course on public spending, leaning on targeted interventions rather than across-the-board expansion.
The Budget prioritises capital expenditure, manufacturing, healthcare and MSMEs, while pushing a larger share of investment responsibility to states and betting on reforms and asset sales to support growth.
Here's a closer look at Budget 2026’s choices, trade-offs and growth priorities.
Over to the states
Despite the fiscal constraints, the thrust on public spending remains. The Budget allocated ₹12.2 trillion ( ₹11.2 trillion in FY26) for capex, which, at 3.1% of the gross domestic product (GDP), is the same as last two years. Its hesitance to raise allocation is understandable, since ₹25,335 crore of last year’s allocation was unspent. However, the Centre increased by ₹1 trillion the funds available to the states through interest-free 50-year loans, taking the effective capex to 4.4% of GDP.
Target met
As expected, the government met its fiscal deficit target of 4.4%, despite a ₹78,086 crore revenue shortfall. On account of low inflation, the nominal GDP growth at 8% was much lower than 10.1% assumed in the FY26 budget. This, apart from tax cuts, lowered tax revenues. Higher dividend from the Reserve Bank of India and some trimming of expenditure helped. For FY27, it has budgeted a fiscal deficit of 4.3%, maintaining the declining trend since the pandemic.
No glide path
Last year, the government said it will ensure that debt as a share of GDP is on a declining trend every year. It also said that by FY31, it will reduce its debt to 50% of GDP or less. The figure was 56.1% as per revised estimates for FY26. In line with this commitment, it has said that in FY27, debt as a percentage of GDP will drop to 55.6%. This, experts say, is lower than what is needed and the burden appears to have been shifted to the next few years. It has not announced a glide path for debt reduction either.
Manufacturing push
The government has given a targeted manufacturing push. Sectors that have responded well to earlier efforts such as electronics manufacturing and data centres have seen strong increase in outlays. The sunrise sectors such as semiconductors (Semiconductor Mission 2.0 announced) and rare earth minerals (new rare earth corridors; customs duty on critical mineral processing equipment removed) have won support, apart from sectors such as chemicals, capital goods and textiles.
Changed priority?
A lot was expected on the artificial intelligence (AI) front, but the Budget did not touch upon AI models, focussing instead on AI-related infrastructure. All foreign cloud service providers using India-based data centres get a tax holiday up to 2047. It is targeted at the likes of Google, Amazon and Microsoft. This will not only raise the capacity utilization of data centres in India, but also ensure large-scale investment in new centres.
Healthy allocation
India, for its needs, has always massively under-invested in healthcare. This budget has increased the allocation significantly, by 10%, compared to the revised estimates of FY26.
All key healthcare programmes have seen a jump in allocation. This is crucial for enhancing India’s productivity. In an era when non-communicable diseases are on the rise, a strong focus on healthcare is needed to ensure a healthy workforce.
Reform express
The finance minister said as many as 350 reforms have been done or initiated to boost productivity and accelerate growth. She assured that the momentum of the ‘Reform Express’ will be maintained.
The budget also had its share of reform measures to improve ease of doing business and ease of living. The government, in 2025, had unleashed a slew of reforms including GST 2.0, revamp of Income Tax Act (which will come into force in April) and labour laws. It also announced revamp of Customs law, and tweaks to Company’s Act and Insolvency Law.
High on optimism
Divestment is one revenue source the government has failed to tap effectively, with actual realization missing budget estimates every year. This fiscal year is no different. The revised estimates put miscellaneous capital receipts (government jargon for divestment and asset sale) at ₹33,837 crore which predominantly includes offer for sale of Bank of Maharashtra, Indian Overseas Bank and Mazagon Dock Shipbuilders. For 2026-27, the government has assumed a high ₹80,000 crore as miscellaneous capital receipts.
Champion MSMEs
Micro, small and medium enterprises (MSMEs) got a renewed push in the budget. The government wants to catalyse their scaling up—a biggest challenge they face—and create champion MSMEs.
These enterprises, after all, contribute to about 30% of the gross domestic product (GDP), 45% of the manufacturing output and 45% of exports with a potential to create a lot of jobs. The support will come in the form of capital availability, liquidity support and professional support to help them grow to the next level.