OPINION | Budget 2026-27 needs to P.I.V.O.T

Investment is the fuel that keeps the economy moving in the medium term.

By most standard macro yardsticks, India ought to be entering the FY27 Budget season in a reasonably relaxed frame of mind. Real GDP is expected to grow at approximately 7.3% (RBI’s forecast) in the current fiscal year. Inflation has eased substantially, and the Centre appears on track to meet its fiscal deficit target of 4.4% of GDP in FY26. Yet just beneath these aggregates, the picture looks less reassuring.

Gap between aspiration and institutional capability

Net household financial savings dropped to 5.2% of GDP in FY2024, down from 7.2% in FY2023, the lowest in decades, even as household debt has risen; private capex, despite strong corporate balance sheets, remains patchy and still leans heavily on public investment; and the transport system that was meant to fuel the next wave of growth is already showing strain, from slower highway awards to large-scale airline disruptions reflecting operational and capacity bottlenecks. For a country with global-power ambitions, the uncomfortable truth is that the macro aggregates appear fine, but the gap between what India wants to do and what its institutions can reliably deliver is, if anything, widening.

It is against this backdrop that the FY27 Budget must help the economy P.I.V.O.T., i.e. raise Productivity, revive

Investment, strengthen protection for the Vulnerable, rebuild Optimal household savings, and modernise Transport. We discuss these imperatives in turn.

Raising Productivity

At this juncture, the most fundamental pivot must concern productivity, which ultimately depends on the skills of workers and their ability to generate and apply new ideas. Unfortunately, average public expenditure on education has remained stagnant at around 2.8 to 3% of GDP for a decade, despite a formal target of 6% under the NEP 2020 and only modest recent increases in combined Union and State spending. Teacher vacancies exceed a million. National surveys continue to show that a large share of students struggle with basic reading and arithmetic. Worryingly, India’s total R&D expenditure has stagnated at roughly 0.7% of GDP, far below the 2-3% levels typical of countries that have successfully transitioned to higher middle-income status. Despite government initiatives, the ratio has not crossed 1% of GDP, reflecting structural challenges in funding and a lack of private sector participation.

The FY27 Budget should undoubtedly allocate more for education and R&D, but just as important is to change the quality and composition of what is already being spent. One place to start is with teachers. The budget must treat the elimination of vacancies as a time-bound national commitment, and announce tied central grants only against verifiable recruitment by states.

Basic schooling must be treated as economic infrastructure rather than a routine welfare line. Something similar is needed in research. The Anusandhan National Research Foundation (ANRF) should be capitalised adequately, and a larger share of its funds must be routed through competitive, peer-reviewed grants. To strengthen the innovation ecosystem, the budget could also propose incremental tax credits for additional private R&D that actually results in patents or commercial products, drawing on international best practices. And in terms of skills, the emphasis needs to shift from classrooms to shop floors. A larger slice of skilling budgets should support firm-based apprenticeships. Without such a shift in how human capital is developed, India could end up with better physical infrastructure, but a workforce not fully equipped to make the most of it.

Reviving Private Investments

If productivity is the long-term engine, investment is the fuel that keeps the economy moving in the medium term. The central government’s decision since 2020 to lift capital outlays has unquestionably steadied the investment cycle. There has been a step-up in capex to over ₹11 lakh crore in FY25 and a similar magnitude in FY26, accounting for a little over 3% of GDP. This push has helped nudge gross fixed capital formation (GFCF) back to about 31% of GDP, reversing the long slide of the previous decade. But the very success of public investment has now created a constraint. With fiscal consolidation a binding commitment, the state cannot indefinitely play the role of the economy’s primary investor. The private capex cycle that public spending was supposed to catalyse has yet to materialise in any broad-based way.

Today, the paradox is that corporate balance sheets are healthy, profits are robust, and leverage is lower, and yet firms are not scaling up their capacity. The RBI’s surveys indicate that capacity utilisation in manufacturing is around 74-75%, which is respectable, but lower than the thresholds that typically trigger large-scale capex. Data shows that new private project announcements and completions remain well below their highs of a decade ago. The reluctance has less to do with the cost of capital than with the frictions associated with doing business in India.

Payment delays by government agencies routinely stretch beyond the mandated 45 days, effectively shifting working-capital burdens onto contractors and MSMEs and weakening their ability to invest. Regulatory unpredictability in sectors such as logistics, renewable energy and telecom continues to inject hesitation where there ought to be confidence. And the MSME credit gap, estimated at ₹20–25 lakh crore, persists despite an array of guarantee schemes that too often support revolving working-capital lines rather than the term loans that create new productive capacity.

The upcoming Budget must announce a few concrete reforms in this regard. One priority should be a statutory commitment that invoices older than 45 days will automatically attract penal interest. This must be backed by a public, quarterly dashboard of outstanding dues by department and public-sector enterprise. Together, these steps would do far more to improve the investment climate than another round of sector-specific incentives. Furthermore, credit-guarantee schemes targeting MSMEs should be redesigned to prioritise capital expenditure over short-term liquidity support. And in sectors where investment horizons are long (e.g. logistics, digital infrastructure, and green energy), the government should commit to time-bound regulatory roadmaps that reduce the policy-uncertainty premium investors still write into Indian projects. If the FY27 Budget is serious about crowding-in private investment, it should rely less on fresh sops and do more on easing the everyday frictions that make long-term risk-taking hard in India.

Enhancing Protection for the Vulnerable

The third seam in our view is vulnerability. India’s direct benefit transfer (DBT) system has undoubtedly improved targeting. Cumulative Aadhaar-linked transfers now exceed ₹45 lakh crore, with ₹47 lakh crore as of October 2025, with clear reductions in duplicate beneficiaries. But underlying risks remain large. NFHS-5 shows that 35.5% of children under five are still stunted, and 32.1% underweight. Out-of-pocket spending still accounts for nearly 40-45% of total health expenditure — down from over 60% a decade ago, but still high by international standards. Only about 41% of households have any member covered by a health insurance or financing scheme, meaning most families still self-insure against illness and income loss. Vulnerability in this sense is not just social; it also affects labour productivity, savings, and risk-taking.

The FY27 Budget needs to engage with this reality more directly and shift focus from transfers to real risk protection. An economy that wants households to save more and invest in skills cannot leave them one illness or one failed monsoon away from cutting consumption, pulling children out of school, or falling back into debt.

In our view, three priorities stand out.

First, health protection needs a deeper and more deliberate fiscal commitment. Public health spending, at under 2% of GDP, remains low by emerging economy standards. More of it should be directed to primary care and district hospitals, where the impact on financial protection and productivity is greatest. Schemes such as Ayushman Bharat also need to evolve beyond a narrow focus on hospitalisation to gradually cover outpatient and chronic care, which are currently the main drivers of out-of-pocket costs.

Second, programmes that now reach women and informal workers need to be turned into a basic form of labour-market insurance. MGNREGA should guarantee more days of work when rural joblessness rises, and schemes like PM-KISAN or other cash transfers should top up benefits in periods of sharp income or price shocks, rather than paying the same amount regardless of conditions.

Third, the FY27 budget must start treating climate risk as a core design parameter for safety nets. The Budget should institutionalise a dedicated climate-risk window within crop insurance and disaster-relief funds, with clearly defined district-level triggers for droughts, floods and heatwaves. It should also earmark a defined share of MGNREGA and rural capex for the creation of climate-resilient assets in the most exposed blocks, rather than relying on post-disaster works. And it must explicitly provide for the full portability of PDS, health cover, and key cash transfers, so that households forced to migrate due to climate shocks do not lose their entitlements. These could be useful macro-stabilisation tools.

Rebuilding Optimal Household Savings

Net household financial savings, which for decades hovered in the 7–8% of GDP range, have slipped to around 5–5.2% in recent years, the lowest in decades. Overall gross savings, at roughly 30–31% of GDP, have held up only because government dissaving has narrowed and corporate savings have remained strong.

This poses a contradiction for the government’s intended investment-led growth strategy. India aims to maintain investment ratios at around 35% of GDP while keeping the current account deficit manageable; however, the primary domestic source of long-term, low-cost capital — household savings — appears to be faltering. The visible prosperity of rising consumption, buoyant markets and abundant fintech credit obscures a deeper fragility – that unsecured loans have grown faster than incomes until recent regulatory curbs were introduced.

The FY27 Budget cannot reverse these behavioural shifts overnight, but it can realign incentives in ways that matter at the margin. A modest enhancement of tax-advantaged limits for long-term retirement products and annuities would nudge households toward instruments with longer duration. Equally important could be the creation of more retail-friendly channels for infrastructure investment. Building on the RBI’s Retail Direct initiative, the Budget could support a dedicated platform that enables households to purchase, hold, and trade infrastructure-linked government securities and bonds in small denominations with transparent risk characteristics. On the liability side, the Budget should support the RBI’s efforts to cool unsecured retail credit by closing regulatory arbitrage in digital lending, resist tax or subsidy support for consumption credit, and redirect policy incentives towards income- and asset-generating loans. In the long run, deeper domestic savings are the only sustainable way to finance India’s investment ambitions without overburdening the state or relying excessively on foreign inflows.

Modernizing Transport

The final seam of the pivot must concern transport that increasingly appears as one of India’s binding constraints at this juncture. The past decade has seen a visible expansion of physical networks, driven largely by public investment, but capacity stress is now becoming evident across modes. National highway construction, which averaged over 12,000 km per year during the peak years of the capex push, has slowed as new awards have tapered off. The railways are carrying record passenger volumes on corridors that are already saturated, even as freight demand rises and competes for the same network space.

A recent NITI Aayog and Indian Railways study shows that all six high-density rail routes in India are operating above 100% of their designed capacity, highlighting severe congestion on the backbone of the national rail network. Civil aviation has offered a more immediate warning signal. The recent Indigo fiasco, involving aircraft groundings, crew shortages, and operational lapses, has exposed the fragility of a system stretched by rapid growth. Major metro airports are operating close to capacity, despite ongoing expansions, while logistics costs, although declining, remain high relative to those of economies India hopes to compete with in manufacturing and exports.

From an economic standpoint, congested and unreliable transport networks raise inventory costs, disrupt supply chains and erode export competitiveness. As India seeks to move into higher-value manufacturing and integrate more deeply into global value chains (GVCs), transport reliability must become as important as scale.

The FY27 Budget must remove the bottlenecks that now shape transport investment decisions, and it must do so through explicit commitments rather than broad intent. On railways, the Budget must lay down a time-bound financing and delivery plan for the next phase of the Dedicated Freight Corridors and for capacity augmentation on the busiest passenger corridors, backed by a measurable rollout of modern signalling and automatic train protection on identified high-density routes. On airports, the Budget should announce a standardised PPP and concession framework—covering tenure, tariff-setting principles, risk allocation, and dispute resolution—so that airport expansion is not renegotiated project by project and long-term private capital can price risk predictably. On roads, the Budget must shift the focus from kilometre targets to asset performance. It should set clear annual targets for NHAI’s asset monetisation and earmark a multi-year maintenance budget so road quality does not slip as traffic rises.

Last year’s Budget spoke in the language of GYAN—Garib, Yuva, Annadata and Nari. The FY27 Budget should retain that social compass, but it also needs an economic PIVOT. Such a focus would not only accelerate growth in the short and medium term, but also lay the foundation for long-term productive human capital and robust infrastructure—critical for India to achieve its aspiration of becoming a developed nation by 2047.

(Amarendu Nandy is Associate Professor, Economics & Public Policy Area, IIM Ranchi and Sayantan Kundu is Assistant Professor, Finance, IMI Kolkata.)

Views are personal, and do not represent the stance of this publication.