This is not merely a technical detail. Nominal GDP growth is the silent load-bearing pillar of the Budget’s arithmetic. Without it, the coherence of expenditure expansion, deficit compression, and debt stabilisation collapses. The question, therefore, is not whether the Budget is prudent in intent, but whether its underlying macroeconomic wager is historically justified and structurally sound.

The government projects total expenditure of Rs. 53.47 lakh crore in 2026–27, a 7.7% increase over revised estimates for the previous year. Capital outlay rises by 11.5% to Rs. 12.22 lakh crore, while effective capital expenditure expands by 22% to Rs. 17.15 lakh crore once grants for asset creation are included. Simultaneously, the fiscal deficit is budgeted to decline marginally to 4.3% of GDP, even as its absolute size rises to Rs. 16.96 lakh crore.

This combination—higher spending, higher borrowing, but lower ratios—can be reconciled only through a rapidly expanding denominator. The projected decline in the debt-to-GDP ratio from 56.1% to 55.6%, along with a reduction in the primary deficit to 0.7% of GDP, implies nominal GDP growth of roughly 10–10.5%.

That figure is not stated, debated, or stress-tested in the Budget documents. Yet it is indispensable. Without double-digit nominal growth, neither deficit reduction nor debt stabilisation remains credible.

Political discourse celebrates real GDP growth, but fiscal sustainability is governed by nominal expansion. Governments borrow in nominal terms, service debt in nominal terms, and collect taxes from nominal incomes and transactions. When nominal GDP grows faster than the effective interest rate on public debt, deficits can persist without destabilising debt ratios. When it does not, consolidation becomes unavoidable.

Budget 2026–27 clearly opts for growth-led consolidation rather than expenditure-led adjustment. Interest payments alone absorb Rs. 14.04 lakh crore—over 40% of net tax receipts—leaving limited scope for discretionary compression. Cutting expenditure sharply would undermine growth; raising taxes risks dampening demand. Growth, therefore, is not just desirable—it is necessary. The problem is that necessity has been mistaken for inevitability.

India has experienced phases of sustained double-digit nominal GDP growth, but history shows these episodes were conditional, cyclical, and often inflation-driven rather than structurally entrenched.

Between FY2010–11 and FY2016–17, nominal GDP growth averaged around 11–12%. This period combined strong real growth with persistently high inflation, supported by favourable global conditions, commodity price cycles, and an expanding credit environment. Fiscal consolidation during these years benefited from arithmetic tailwinds more than policy discipline. That regime ended decisively even before the pandemic.

From FY2017–18 to FY2019–20, nominal GDP growth slowed to an average of 8–9%, reflecting structural deceleration in real growth, declining inflation, and the transitional disruptions associated with demonetisation and GST implementation. Even then, fiscal ratios became harder to manage despite relatively stable expenditure.

The pandemic years exaggerated volatility. FY2020–21 saw nominal GDP contract by roughly 3%, causing debt and deficit ratios to balloon mechanically. FY2021–22 delivered a dramatic 19% rebound—but this was overwhelmingly a base-effect phenomenon amplified by inflation rather than a durable expansion. It temporarily repaired fiscal optics without resolving underlying constraints.

More revealing are the post-normalisation years. Nominal GDP growth reached around 15% in FY2022–23, aided by reopening dynamics and elevated inflation. By FY2023–24, it had already moderated to roughly 9–10%. Preliminary estimates for FY2024–25 suggest nominal growth closer to 8.5–9.5%, depending on final deflator outcomes.

The trend is unmistakable: double-digit nominal GDP growth is no longer the default state of the Indian economy. It has become episodic, fragile, and increasingly dependent on inflation behaving in fiscally convenient ways.

To achieve the Budget’s implied nominal growth, the economy must deliver real growth of around 6.5–7% while sustaining GDP deflator inflation of roughly 3–3.5%. This is a narrow corridor.

If real growth weakens—due to soft consumption, uneven private investment, or external headwinds—the arithmetic fails. If inflation undershoots—due to global disinflation, commodity price correction, or effective monetary tightening—the denominator shrinks. Paradoxically, successful inflation management becomes a fiscal risk.

This is not a hypothetical concern. GST collections are budgeted to remain broadly flat in real terms, signalling consumption fatigue. Private investment, despite high capacity utilisation in some sectors, remains below its historical peak as a share of GDP. Exports face weak global demand and geopolitical fragmentation. In this environment, assuming nominal growth at the upper end of recent experience is less a baseline than a best-case outcome.

The reliance on nominal growth is clearest on the revenue side. Net tax receipts are projected to rise by 7.2%, with income tax collections growing by 12.5% to Rs. 14.66 lakh crore. This reflects deepening formalisation and compliance—but also increasing dependence on a narrow base of salaried and corporate taxpayers.

GST revenues, by contrast, show limited real growth, highlighting the uneven nature of demand recovery. Should nominal GDP growth undershoot, revenue buoyancy would weaken rapidly, forcing either higher borrowing or renewed reliance on non-tax windfalls—precisely the practices the Budget claims to be phasing out.

The projected decline in the debt-to-GDP ratio is presented as evidence of fiscal credibility. Yet the improvement is modest and entirely growth-driven. Gross market borrowings remain elevated at Rs. 17.2 lakh crore. The state is not deleveraging; it is betting that growth will outrun liabilities.

Such a strategy is viable only when growth is resilient and predictable. India’s recent experience suggests the opposite. Nominal GDP growth has become more volatile, not less, increasing the risk that fiscal ratios will swing sharply with macro conditions.

To markets and rating agencies, the Budget signals restraint without austerity, confidence without bravado. Capital expenditure rises even as deficit ratios fall, suggesting belief in growth multipliers rather than fiscal compression.

But markets price risk, not intent. A 10-basis-point reduction in the deficit ratio leaves no cushion. Any slippage in nominal growth—whether through inflation cooling faster than expected or real growth faltering—would immediately test the credibility of the consolidation path. The reassurance, in other words, is conditional.

Transfers to states rise sharply to Rs. 25.44 lakh crore, reflecting continued adherence to 41% vertical devolution. This strengthens cooperative federalism but further compresses the Centre’s fiscal space. Here too, nominal GDP growth is expected to do the heavy lifting. A growing denominator expands space for both Centre and states without hard choices. A slowing one revives old tensions over borrowing limits, transfers, and fiscal responsibility.

Budget 2026–27 is often described as balanced and realistic. A more accurate description is that it is exposed. It places extraordinary faith in nominal GDP growth to reconcile competing objectives: higher investment, lower deficits, stable debt, and political restraint.

History does not say this wager will fail. It says it will succeed only under conditions that are increasingly rare: stable global demand, cooperative inflation dynamics, and uninterrupted domestic momentum. Absent these, the Budget’s arithmetic becomes brittle.

In fiscal policy, optimism is inevitable. But when optimism replaces buffers, it becomes risk. Budget 2026–27 does not collapse under scrutiny—but it stands upright only so long as nominal growth remains kind. That is not a strategy. It is a hope dressed up as arithmetic. (IPA Service)