Clipped from: https://www.thehindubusinessline.com/opinion/govt-forced-to-walk-a-fiscal-tightrope/article70557799.ece
Budget should protect capex, ease pressure on middle-class finances, broaden tax base without compressing consumption
Budget: Hard choices for the government | Photo Credit: iStockphoto
India today stands at a crossroads. The Finance Minister has declared that reducing the debt-to-GDP ratio will be a central policy priority. The intent is sound. According to the International Monetary Fund, India’s general government debt — the combined borrowing of the Centre and States — is estimated at around 80-82 per cent of GDP, which is elevated by emerging-market standards. Yet the path to lowering that ratio is far from straightforward.
In theory, governments reduce debt in three ways: cut spending, raise revenues, or grow faster. In India’s case, each option runs into hard constraints. More than 80 per cent of government revenues are pre-committed to fixed overheads-salaries, pensions, interest payments, subsidies and welfare — politically sensitive or contractually binding items. What remains discretionary is capital expenditure. This is why some economists have suggested trimming capex to restore fiscal balance.
Capex conundrum
But this is where arithmetic collides with reality. Government capex has been the single most important growth engine over the past three years. Infrastructure spending has supported private investment, employment and confidence. Cutting it may improve near-term fiscal optics, but it risks slowing GDP growth, weakening the denominator of the debt-to-GDP ratio. Fiscal consolidation that undermines growth often delays, rather than accelerates, debt reduction.
If spending cuts are constrained, revenues must do the heavy lifting. Here, warning signs are emerging. After a post-pandemic recovery, India’s revenue engine is losing momentum. In December, net GST collections grew by about 2.2 per cent year-on-year, reflecting weak domestic demand even as import-linked GST remained resilient. This slowdown is tied to a deeper structural pressure point: the weakening financial position of households. India’s growth model has long relied on domestic savings to finance government borrowing and private investment. That foundation is eroding. According to RBI data, net household financial savings declined to around 5.1 per cent of GDP in FY 2022–23, among the lowest levels in decades, reflecting rising leverage and slower asset accumulation.
Households under pressure
Household debt climbed to about 41.3 per cent of GDP by end-March 2025, up from roughly 36-38 per cent a few years ago. The rise signals not excess exuberance, but growing financial strain across income groups.
The middle class sits at the centre of this squeeze. Per capita household debt is rising not because families are splurging, but because incomes are failing to keep pace with costs. Salary growth outside high-end services and government employment has slowed materially. For most urban salaried households, nominal wage increases are modest and real wage growth is close to flat.
What sharpens the pain is the nature of inflation. Headline inflation may appear manageable, but services inflation (a part of the consumption basket most relevant to the middle class) remains stubbornly high. Education, healthcare, housing rents, insurance premiums and transport costs have risen faster than general inflation. As a result, households are borrowing to maintain living standards, while savings are depleted by necessity rather than choice.
A leveraged middle class is a cautious middle class. Consumption weakens, discretionary spending is deferred, and risk appetite falls. This feeds directly into slower government revenue growth and a more hesitant private investment cycle. When growth slows and uncertainty rises, domestic politics rarely rewards restraint. Populism becomes the default response. Subsidies, loan waivers, public hiring and administered returns on small-savings schemes expand.
Pay Commission payout
The looming Eighth Pay Commission threatens to push fixed expenditures higher, while monetary easing struggles as administered savings rates remain elevated.
This is the backdrop against which the 2026 Union Budget will be framed. It cannot chase debt reduction through blunt expenditure cuts, nor rely on optimistic growth assumptions. Choices must be calibrated: protect growth-supporting capex, ease pressure on middle-class finances, broaden the tax base without compressing consumption, and restore fiscal credibility gradually.
India’s margin for error has narrowed. Fiscal consolidation, growth and household balance sheets are now inseparable. Getting that balance right in Budget 2026 will determine whether India’s ambition translates into durable prosperity or stalls under the weight of arithmetic.
The writer is Professor of Finance, IMT Ghaziabad
Published on January 28, 2026
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