Article 2 : Fiscal Readiness & Growth
GS 3: Indian Economy (Government Budgeting, Public Expenditure, Taxation, Fiscal Policy and Infrastructure Development)
Why in News: The Union Budget for FY 2026–27 is scheduled to be presented on 1 February 2026, amid debates on government spending, taxation levels, and infrastructure priorities.
Key Details
- India’s economy is described as being in a ‘Goldilocks phase’—stable growth with controlled inflation.
- The FY 2025–26 Union Budget size was ₹50.65 lakh crore, reflecting high public expenditure.
- Direct tax-to-GDP ratio remains low despite relatively high marginal tax rates.
- Capital expenditure on infrastructure has tripled since 2019–20, raising questions about future priorities.
Government Spending: Size, Quality and Impact
- Magnitude of Public Expenditure: India’s government spending is around 30% of GDP, comparable with some emerging market economies, though lower than countries like Brazil, South Africa and China.
- Improvement in Spending Quality: Over the last 25 years, spending efficiency has improved due to higher capital expenditure and greater devolution of funds to states under Finance Commission recommendations.
- Shift towards Capex: The government has prioritised infrastructure-led growth, as capital spending has a higher multiplier effect compared to revenue expenditure.
- Fiscal Prudence Concerns: While high spending supports growth, concerns remain regarding fiscal deficit targets and long-term debt sustainability.
Taxation in India: Low Base, High Rates
- Direct Tax-to-GDP Ratio: At around 7.6%, India’s direct tax-to-GDP ratio is among the lowest for both emerging and developed economies.
- Narrow Tax Base: Around 80 million income tax returns were filed in AY 2024, but a majority reported zero taxable income, limiting revenue potential.
- Improving Compliance: The number of non-zero income tax filers has doubled in the last five years, reflecting better formalisation and digital enforcement.
- Policy Dilemma: High marginal tax rates with a narrow base raise questions about tax buoyancy, equity, and the need for rationalisation.
Infrastructure Spending: From Catch-up to Expansion
- Sharp Rise in Capital Expenditure: Union government capex increased from ₹4.2 lakh crore in 2019–20 to ₹11.21 lakh crore in 2025–26, signalling a strong infrastructure push.
- Focus on Physical Connectivity: Investment in roads, railways, ports, and logistics aims to reduce transaction costs and enhance competitiveness.
- Global Comparison: Despite progress, India’s road density and average speeds remain lower than advanced economies, indicating scope for improvement.
- Execution Capacity: Improved project management, digital monitoring, and private sector participation have strengthened implementation capability.
India’s ‘Goldilocks Phase’: Opportunities and Risks
- Macroeconomic Stability: Controlled inflation, stable growth, and manageable external balances place India in a relatively favourable position.
- State-led Investment Cycle: Public investment is expected to crowd in private investment, supporting medium-term growth.
- Social Sector Pressures: Rising spending needs in health, education, and welfare must be balanced with fiscal discipline.
- Global Uncertainties: External risks such as geopolitical tensions and global slowdown may influence budgetary priorities.
Conclusion
The FY27 Union Budget presents an opportunity to consolidate India’s growth momentum by improving spending efficiency, widening the tax base, and sustaining productive infrastructure investment. A balanced approach combining fiscal prudence with growth-oriented reforms will be critical for achieving inclusive and sustainable economic development.
EXPECTED QUESTIONS FOR UPSC CSE
Prelims MCQ
Q. India’s direct tax-to-GDP ratio is low primarily due to:
(a) Low marginal tax rates
(b) High tax evasion alone
(c) Narrow tax base
(d) High indirect taxes
Answer: (c)
Descriptive Question
Q. “Infrastructure-led growth remains central to India’s development strategy.” Discuss in the context of recent trends in public capital expenditure. (150 Words, 10 Marks)