Fiscal Policy & Deficit Management: Fiscal consolidation in India has been more about optics than structural reform. In light of the Union Budget 2026-27, critically examine this statement.

Question

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Introduction:

The Union Budget 2026–27 projects a fiscal deficit of ~4.5% of GDP, signalling adherence to a consolidation path, but the quality of this adjustment determines whether it is substantive or merely optical.

Body:

On the one hand, there is evidence of genuine progress. The government has reduced the deficit from pandemic highs while sustaining capital expenditure at ~3.3–3.5% of GDP, indicating a shift toward growth-enhancing spending. Improved tax buoyancy—especially in direct taxes and GST compliance—has strengthened revenues. Greater transparency, including reduced reliance on off-budget borrowings compared to earlier years, also supports the credibility of consolidation.

However, several features lend weight to the “optics” argument. A large share of expenditure remains locked in committed liabilities—interest payments (over 40% of revenue receipts), subsidies, and salaries—limiting structural reprioritisation. Consolidation partly relies on optimistic nominal GDP growth assumptions, which, if unmet, could lead to slippages. The use of accounting devices such as classifying Grants-in-Aid for capital assets as revenue expenditure and focusing on “effective capital expenditure” can blur fiscal assessment. Moreover, subsidy rationalisation has been uneven, and state-level fiscal stress is not fully captured in the Centre’s consolidation narrative. Public debt remains elevated (~80% of GDP), indicating limited structural correction.

Conclusion:

While Budget 2026–27 reflects a pragmatic consolidation path, deeper reforms—broadening the tax base, rationalising subsidies, and reducing interest burdens—are essential to move from optical adjustment to durable fiscal sustainability.

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