Can Budget 2026-27 capitalise on India's low high economic growth with low inflation?

Last year started on an uncertain note as the threat of tariffs by the then recently inaugurated US administration under President Donald Trump hovered over the global economy and India, raising concerns over trade and growth prospects across the world. In India, private consumption had remained uneven and elevated food prices kept retail inflation stubbornly high all through 2024.

Fast forward to the dawn of this year, and the Indian economy appears to be on a stronger footing, enjoying a so-called Goldilocks phase of high growth and low inflation, largely shrugging off the 50% tariffs the US imposed on Indian exports as well as a series of geopolitical developments that rocked the world over the year.

The Indian economy grew by 6.5% in 2024-25 and is pegged to have expanded at a stronger 7.4% this fiscal, buoyed by a normal monsoon, cuts in income tax and goods and services tax (GST), and lower interest rates. Together these measures are believed to have boosted private consumption demand across urban and rural households and helped offset the impact of the US tariffs to some extent. Easing retail inflation, which averaged about 2.2% in 2025, also gave consumers some respite.

The growth momentum is expected to continue in FY27 as well, with analysts estimating that the economy could expand anywhere between 6.4% and 6.9%.  

Echoing the optimism, Christian de Guzman, Senior Vice President at Moody’s Ratings, says the agency expects the country to remain the fastest-growing G20 economy in the next two years amid steady but subdued global demand conditions, and despite the downside risks posed by the ongoing tariff uncertainties vis-à-vis the US.

Moody’s projects that India’s real GDP growth will moderate to 6.4% in FY27 from 7.3% in the current fiscal and has forecast annual average inflation to normalise from the historically low levels of around 2.4% in FY26 to 3.2% in FY27.

“The impact of the US’ very punitive tariff on India will be mitigated by prominent exceptions to some of the country’s largest exports, including many pharmaceutical and electronic goods, as well as India’s efforts to diversify and expand its trading relationships with other countries,” says de Guzman. He adds that domestic demand will remain a more important determinant of India’s broader economic performance.

For Union Finance Minister Nirmala Sitharaman and her team preparing the Union Budget 2026-27, which will be presented on February 1, all of this has meant a moment of relative calm, which is a break from the usual firefighting that they are wont to do.

The Reform Imperative

However, scratch the surface and there’s still plenty that needs to be done, despite an action-packed 2025 when the Centre went on a reforms drive, rationalising GST, implementing the long-pending Labour Codes, and introducing an Export Promotion Mission to diversify India’s trade basket and markets.

For one, industry still remains worried about the external situation with sectors like textiles, leather goods and small and micro industries impacted by the tariffs.

States’ finances are also in a precarious condition. High welfare spending has led to a sharp increase in revenue expenditure for many of them, even as capital expenditure, or capex, has been a priority. The GST cuts could add to their pain by reducing revenues. Growth in states’ GST collections slowed to 5.2% in the first eight months of FY26, compared with approximately 14% in the corresponding periods of the last two years, says a report by CareEdge Ratings. That was even before the GST cuts were rolled out. The report added that the cuts, implemented in September, could weigh further on states’ full-year GST collections.

Additionally, the Centre has constituted the Eighth Pay Commission for central government employees. Several states will follow suit with their own pay panels, and that will further strain their finances as salaries and pensions may rise.  

In this backdrop, the report of the 16th Finance Commission, to be tabled in Parliament in the Budget session, will provide clarity on the devolution of revenue between the Centre and states for the next five years till 2030.

On the household front, savings have been falling while credit card debt and personal loans have been rising, sparking worries about consumers overleveraging. Household savings are seen to have declined to 18.1% of GDP by FY24 from a peak of 22.7% in FY21, while personal loans rose to 17.7% of GDP by the end of FY24, from 15.4% in FY21. In December 2025, credit card spending rose by 9% year-on-year.

In its Economic Outlook report, India Ratings and Research highlighted this dichotomy while pegging GDP growth for FY27 at 6.9%, underlining that domestic reforms, including the income tax cut in the FY26 Budget, GST rationalisation, and three foreign trade agreements—with Oman, UK, and New Zealand—will help the economy withstand global uncertainties caused mainly by the US tariffs.

However, Devendra Kumar Pant, Chief Economist and Head Public Finance at India Ratings, sees headwinds ahead, including the El Niño climate pattern from mid-2026 that could result in deficient monsoon rains, a weak currency due to tepid capital flows, sluggish global trade growth, a waning base effect, and slower growth of net production taxes due to GST cuts. “Another emerging headwind is artificial intelligence,” he adds.

While private final consumption expenditure, which constitutes 56% of the GDP, is seen to be more broad-based and is estimated to grow by 7% this fiscal, private investments are yet to stage a similar recovery. That has been a recurring concern over the past few years.  

A fast-depreciating rupee, which fell by over 4% against the US dollar in 2025 and breached the 90 mark for the first time, has also been a point of pain, although the government and the Reserve Bank of India maintain that this has been due to external factors.

De Guzman of Moody’s says India’s fiscal strength remains the weakest point in the country’s sovereign credit profile, “reflecting the persistence of high debt and low debt affordability despite a lengthening track record of fiscal deficit consolidation since the pandemic.”

Great expectations

Policy watchers note that the government has not waited for the Union Budget to unveil reforms in recent years. Even so, there are expectations that Budget 2026-27 will propose more reforms to build a self-reliant and resilient economy that would carry forward the growth momentum.

Sources underline that the focus on decriminalisation and deregulation will continue to improve the ease of doing business, while the government will also work on extending more support to micro, small and medium enterprises (MSMEs) and exporters. These measures are expected to attract more foreign investments, which have reduced amid the recent global turbulence.

Though several measures have already been undertaken, more reforms in the customs duty structure, including rates and processes, are expected in the Union Budget. This would help exporters and align with the country’s foreign trade policy. A three-tier customs duty structure is expected along with a revamp of various schemes including the Special Valuation Branch (SVB) and the Authorised Economic Operator as well as tweaks in the Special Economic Zone scheme.  

“Customs reforms are expected to be on the 4S’—slabs, simplification, SVB and SEZ,” says Harpreet Singh, Partner, Indirect Tax at Deloitte India.

The delivery and implementation of reforms will also be a key focus. For instance, industry is awaiting clarity on the fine print of the Labour Codes.

Experts and agencies are also waiting for clarity on the government’s debt reduction and fiscal consolidation plan that is expected to be unveiled in the Budget. The government is expected to state how it plans to lower its debt as a percentage of GDP, a goal that was announced in the previous Budget.

Additionally, announcements on consolidation and stake sales in public sector banks as well as the completion of the disinvestment of IDBI Bank will be watched.

Pant of India Ratings says one area that will receive close attention is the allocation for the newly launched Viksit Bharat-Guarantee for Rozgar and Ajeevika Mission (Gramin), or VB-G RAM G, for FY27 considering its impact on the rural economy. “While the government has focussed on physical infrastructure, what is also needed is an improvement in the quality of the labour force that will use and operate these infrastructure assets. There could be higher allocation for the social sector,” he adds.

Measures for improving urban infrastructure—including better sanitation systems and roads—are also expected as these would encourage foreign players to set up factories in India, apart from improving the lives of citizens.

Clearly, there is a lot to be done. The Goldilocks moment gives the government the muchneeded breathing space to supercharge the reform drive.

@surabhi_prasad