The Union Budget for 2025-26 has maintained fiscal prudence without compromising on the quality of expenditure, with a stable government borrowing program that is positive for markets, according to an analysis by Bank of Baroda economists.
The analysis highlights that the momentum of capital expenditure (Capex) for large infrastructure projects in the highways, railways, and ports sectors has been maintained in the Budget. Apart from infrastructure, rural development and agriculture will drive growth in spending. The Centre’s overall expenditure is estimated to increase from $570 billion in FY25RE to $613 billion in FY26BE, led by both revenue and capital spending.
The Centre’s capex spending is expected to increase sharply to $135 billion from $123 billion as per FY25RE. As a percentage of GDP, the ratio of capex is retained at 3.1%. The government expects nominal GDP to rise by 10.1% in FY26, recovering from 9.7% growth in FY25. The overall tax revenue-GDP ratio is estimated to remain steady at 12% in FY26 BE versus 11.9% in FY25 RE.
The direct tax-GDP ratio is expected to increase to 7.1% from 6.9%, while the indirect tax-GDP ratio will remain stable at 4.9% in FY26 BE, unchanged from FY25 RE. In line with the fiscal glide path outlined in the Budget for 2021-22, the fiscal deficit (as a percentage of GDP) was lower in FY25 and will be brought down by another 0.40% in FY26.
The government has also lowered its debt-GDP ratio from 58.1% in FY24RE to 57.1% in FY25RE. In FY26BE, this is estimated to come down further to 56.1%. By 2031, the government plans to lower its debt-GDP ratio below 50%, as recommended by the 16th Finance Commission.
The report states that the size of the budget has seen a steady increase over the past few years, with growth averaging around 7.6% over the last five years, compared with average nominal GDP growth of 12.5%. The increased size aims to improve the quality of spending.
The Centre’s net revenue collections are estimated to align with growth in nominal GDP. On a net basis, revenue collections are estimated to increase by $40 billion this year, while gross tax collections are estimated to register a significant incremental improvement in FY26BE ($51 billion) compared with last year ($47 billion). This is driven by an increase in corporate tax receipts and indirect tax collections.
The report points out that the incremental increase in income tax collections will be lower, as the government has decided to forego $12 billion as a tax rebate. Indirect tax collections are also projected to increase, albeit slightly at a slower pace compared with direct taxes. Of the incremental $16 billion increase expected over the previous year, $14 billion will be on account of GST collections alone. Increased compliance and prospects of higher domestic consumption will be key drivers.
Within excise, agriculture infrastructure and development cess, duty on petrol and diesel, and basic excise duties will gain momentum. The Union Budget for FY26 outlines employment, skilling, agriculture, MSMEs, women, infrastructure, and space technology as key areas where the government will focus in the next five years.
