THE YEAR 2025 was marked by global crises that affected India’s exports, increased defence requirements, and heightened investor risk perceptions. A volatile neighbourhood, with domestic problems in Myanmar, Bangladesh, Pakistan, Nepal, Afghanistan, and Iran, also affects India in various ways, including the reliability of oil supplies and trade dislocations. Domestically, revenue softness, sticky food inflation, and high debt servicing posed challenges to achieving fiscal targets.
Despite these challenges, the Indian economy demonstrated remarkable resilience, with GDP growth reaching 8.2 per cent in the second quarter and advance estimates indicating an average growth of around 7.9 per cent through 2025. Record levels of inflation control, exceptional growth in the services sector, robust consumer spending following GST reform, the government’s capex push, and the acceleration in the manufacturing and electronics boom were the main drivers that kept India on a high-growth trajectory.
Nonetheless, the average forecast for economic growth in FY 26-27 is around 6.4 per cent, compared with 7.1 per cent in FY 25-26. Although this 0.7 per cent drop is modest, further disruptions to trade due to wars, sanctions, and higher tariffs cannot be ruled out. Despite the challenges and associated risks, the Budget is the government’s opportunity to implement measures that enhance confidence and investment in India, thereby counterbalancing negative external factors and bolstering domestic growth and employment.
As an underlying theme, we suggest a ‘leaning against the wind’ approach. This should include a disciplined fiscal response and impactful regulatory reforms. The current situation does not warrant fiscal stimulus in the form of increased government spending or lower taxes. The Budget should enhance fiscal discipline by compressing expenditure and increasing revenue, thereby reducing the fiscal deficit. This will give the Reserve Bank room to cut interest rates amid lower inflation, stimulating private investment. Further, the government must monitor and prevent fiscally fragile states from becoming problematic. The 16th Finance Commission can provide these states with a supportive hand, based on a committed set of reforms that ensure future fiscal discipline.
The forecast for nominal economic growth for FY 26-27 is about 10 per cent. However, given the revenue softness in the current year, achieving the targets for FY 25-26 will require considerable effort from tax administrators; the current tax buoyancy of 0.32 for H1 of FY 25-26 would need to be pushed much higher for FY 26-27. A conservative fiscal policy would, therefore, imply a cap on expenditure increases of less than 10 per cent, providing sufficient room for a lower fiscal deficit. However, much of the expenditure increase will have to be earmarked for defence.
Without a major fiscal stimulus to boost demand, the government needs to focus on regulatory reforms to improve India’s business environment. This Budget should provide a time-bound action plan for major reforms across key sectors of the economy, including financial services, capital markets, urban development, infrastructure, real estate, and the environment. It would be appropriate to lay out the roadmap for a single GST in this Budget, providing the long-term clarity and predictability that investors yearn for.
With 46 per cent of the workforce, agriculture contributes only 16 per cent to GDP. Its share of exports is just 13 per cent. There is immense potential to be unlocked through modern value chains and processing. A prosperous rural economy calls for an urgent reinvention of the systems that attract investment, raise productivity to global standards, integrate markets, boost exports, and drive the sector to double-digit growth through policy and ownership reforms that build on technology and supply-chain reinvention.
Economic sovereignty today is intertwined with energy security. Over the past decade, India has been inching closer to achieving that goal by resolving chronic issues in coal production. Looking ahead, current geopolitics indicate that the world oil market will remain unpredictable in the near term. Hence, moving forward, India needs to reduce its dependence on oil by promoting EVs and renewable energy options.
Conversely, issues relating to natural gas are within our reach. Natural gas is not being extracted in large volumes in India due to policy gaps, leading to large-scale imports. As a result, the domestic price of natural gas is much higher ($4.70 per MMBtu in Q3 2025) than in the US ($3.81) or China ($2.72). Despite holding estimated reserves of about 1,370 billion cubic metres, India still imports about 45 per cent of its current requirements. While the Petroleum and Natural Gas Rules 2025 aim to address issues related to exploration licensing and investment, careful monitoring of their implementation and the resolution of encountered challenges are required.
In the power sector, India has built the required generation capacity and harnessed renewable energy to the point that it now contributes more than 51 per cent of installed capacity. However, the sector’s growth is hampered by the lack of a national electricity market, resulting in low investment in transmission grids and battery storage capacity. This Budget can bring renewed focus to investment in transmission infrastructure, continued momentum in renewables and storage, and competition in the distribution sector.
Can policy boost growth and create wealth? Yes, in three ways. First, by unlocking state-owned natural resources. Second, by leading innovation on both the supply and demand sides. “Import, copy, adapt, and invent” is a step-wise evolution documented by the World Bank. This evolution requires policies for free trade, contract enforcement, dispute resolution, free entry and exit, liquidation, equity, venture capital, R&D, habitat, infrastructure, and the environment.
Third, the sum of policies is greater than its parts. Policy is the basis for designing systems and institutions, including markets. Public policy cuts across disciplines, departments, and markets. Hence, it requires a meta-organisation that only the government can design, create, and manage. This can be done in every city and state.
A combination of conservative fiscal and tight monetary policy is required to shore up confidence, spur investment and employment, and provide Indian firms with a low-risk domestic environment, thereby enhancing their competitiveness. This “Goldilocks moment” is the most opportune time to start the virtuous cycle of fiscal discipline, growth, and higher revenues.
The authors were chief secretaries of Punjab.