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The Union Budget 2026 has been formulated and presented against an unusually challenging economic backdrop, marked by strong headwinds on both global and domestic fronts. Internationally, the imposition of steep 50 per cent tariffs by the United States under the Trump administration, the withdrawal of the European Union’s Generalised System of Preferences (GSP) that had allowed Indian exports preferential access, muted FDI inflows, and sustained FII outflows exceeding ₹1.6 lakh crore during 2025 have weakened external conditions. Domestically, GST rate rationalisation, the ₹12 lakh income-tax exemption, weak corporate earnings in the third quarter of FY26, and a liquidity-constrained banking system reluctant to fully transmit interest-rate cuts have intensified fiscal pressures. Against these crosscurrents, the government and its supporters argue that the Finance Minister has preserved fiscal discipline while steering the budget towards long-term growth and demand creation.

The Budget Announcements

The budget proposes to limit the fiscal deficit to 4.3%, marginally lower than last year’s 4.4%. Capital expenditure has been raised to ₹12.2 lakh crore, with a strong focus on infrastructure development—roads, railways, high-speed rail corridors, inland waterways, and urban infrastructure. It also seeks to strengthen the education–employment linkage by establishing universities near industrial clusters. In healthcare, the budget outlines plans to expand primary healthcare, digital health services, and medical infrastructure. Measures targeting farmers, small traders, economically weaker households, minorities, senior citizens, and women signal an intent towards inclusive growth. Yet, while the budget appears people-centric at first glance, closer scrutiny suggests that fiscal consolidation remains the government’s overriding priority.

A major weakness is the absence of serious revenue-mobilisation efforts, such as property or inheritance taxes, that could also address India’s widening inequality. The sustained rise in public capital expenditure over the past four years points to structurally weak private investment, with little prospect of near-term recovery. This, in turn, suppresses employment growth and consumption demand. The outcome is higher borrowing by the Centre and reduced fiscal transfers to states, pushing them towards unsustainable debt paths and reinforcing an already pronounced fiscal vicious cycle.

The International Catastrophe

The government’s fiscal strategy is unfolding in an uneasy global context, where similar approaches have triggered macroeconomic stress. The present budget attempts to offset the ₹12 lakh income-tax exemption announced last year and the GST rate cuts implemented in September 2025 by resorting to higher borrowing while offering no further tax relief to the general public. Crucially, the full revenue impact of the GST cuts will only be felt in 2026–27. Meanwhile, the uncoordinated reductions undertaken last year have already strained both central and state finances. Comparable policy missteps in recent years have pushed advanced economies such as the United Kingdom, France, Japan, and Canada into serious economic and political turmoil.

The starkest parallel is the United Kingdom’s 2022 mini-budget under Liz Truss. Unfunded tax cuts, including reducing the top income-tax rate from 45 to 40%, were announced amid double-digit inflation. Markets reacted sharply: 10-year gilt yields surged by over 100 basis points within weeks, sterling depreciated steeply, and the Bank of England was forced into emergency intervention to avert a pension-fund collapse. The government reversed course and imposed austerity, but the damage was done, leading to Truss’s resignation. In India too, in the absence of credible revenue measures, attempts to boost consumption through tax concessions while compressing public spending risk fueling similar instability.

Under Japan’s Prime Minister Shigeru Ishiba (2024–25), fiscal restraint combined with a poor rice harvest in 2023 led to sharp food inflation in 2024–25. The government’s limited release of emergency rice stocks provoked widespread public anger, culminating in the ruling coalition’s defeat in the July 2025 House of Councillors election. This episode is instructive for India, especially if the country faces shocks such as a deficient monsoon in 2026, as forecast by the Australian meteorological agency and noted in the Economic Survey. In such circumstances, compressed public expenditure and fiscally strained states could severely limit relief for vulnerable populations.

France under Emmanuel Macron offers a slower-burning example of fiscal consolidation amid political fragmentation. Efforts to reduce the deficit—targeting around 5.4–5.5% of GDP in 2025—combined pension reforms and social spending cuts with selective business tax incentives. However, low growth, moderate inflation, energy vulnerabilities, and a debt-to-GDP ratio nearing 116–117% triggered widespread protests, executive instability, and parliamentary deadlock. India faces parallel pressures through strained Centre–state fiscal relations, reduced transfers, and incomplete monetary transmission due to heavy state borrowing, all of which risk dampening growth and fuelling social discontent.

Canada under Justin Trudeau illustrates how affordability crises can erode political legitimacy. Trudeau’s resignation announcement on January 6, 2025, followed years of post-pandemic inflation peaking at around 8.1%, soaring housing prices, stagnant real wages, and weakening corporate earnings. Despite moderate deficits, debt-financed spending and subsequent subsidy adjustments alienated voters burdened by high energy and grocery costs. Similarly, in India, consumption-boosting measures unsupported by a robust revenue base may provide only fleeting relief while exposing the government to charges of fiscal mismanagement.

These international experiences serve as a warning. Even though India currently enjoys GDP growth of 7–7.5%, a seemingly manageable debt ratio of 82–85% of GDP, and relatively strong institutions, mounting fiscal pressures, ad hoc tax concessions, expenditure compression, and rising public debt remain serious concerns. Budget 2026, therefore, should not be viewed as a standalone exercise but as part of a broader global pattern in which consumption-led stimulus, unsupported by stable revenues, ultimately undermines economic stability and political legitimacy.