Budget is realistic, agnostic to India-US trade deal, says Nirmala Sitharaman
‘In our push to manufacturing-led growth, small and medium units won’t be left behind’: FM
With the India-US trade deal, the country’s labour-intensive export sectors will derive immediate benefits while investor sentiments will also improve. “Sentiments will change. Money will start flowing in now, much more than earlier,” Finance Minister Nirmala Sitharaman told FE in an exclusive interview. The minister defended the fine balance struck in the Budget FY27 between the growth and fiscal consolidation, and hoped that revenue buoyancy would improve sooner than later. On subsidy rationalisation, the minister made it clear that the government won’t cut down expenditure on anything to do with the farm sector, but said that spending efficiency would indeed be improved through digital means. She also indicated that the government might be looking at measures to boost non-tax revenues, like monetisation of equities in large listed CPSEs. Edited excerpts from an interview with Prasanta Sahu, KG Narendranath and Shobhana Subramanian.
The India-US trade deal happened just the day after the Budget was presented in Parliament. In hindsight, if you had known about the deal, would you have done the Budget a bit differently and slightly more aggressively? Some would say the steps taken in the Budget are on the conservative side….
No, I think I have always been realistic. People have asked me why I’m not ambitious enough. I’ve replied that this Budget is prepared realistically, and that’s good.
Now that the deal is struck, would the GDP growth assumptions need to be revised? People have talked about additional growth of 20-30 bps in the next financial year. What is the government’s view?
The deal has to be signed. What we know now is only that the additional US tariffs on Indian merchandise will be reduced from 50% to 18%. You need to know the entire details of the deal (to make any revision in growth projections). That is why I’m saying the Budget is fairly infused to take care of such situations — uptick or downtick.
The Budget is not an incident-specific event. It is for the whole year and cannot hinge on one particular incident. So, even if the agreement had happened the day before, I wouldn’t have changed it.
But we are talking about as big a thing as a trade deal with the world’s largest economy, which is driven primarily by consumption…
Even with that, I would still say this Budget reflected the larger issues.
Production-linked incentive (PLI) schemes have been a mixed bag, yet attracted investments four to five times the outlays on an aggregate basis. The Budget has provided adequate amounts for these schemes, taking into account the pattern of intake. The ministries concerned have reportedly asked for extending PLIs to emerging and high-tech sectors like AI, space, critical nuclear components etc. The Budget, however, seems to have changed tack by unveiling differently structured interventions to aid manufacturing in identified strategic and frontier sectors. What has prompted this shift?
There is no shift. Large, scalable projects with intense labour and export components have always been supported under PLI. Incidentally, they are frontier sectors. These schemes will continue, along with the new support for seven strategic sectors.
Manufacturing emphasis is like a coin. One side is large, scalable, export-oriented projects with many jobs. All these are being supported through PLI. The other side is MSMEs, and their intent is to make champions out of the medium-sized industries. Medium enterprises often do not grow for fear of losing MSME benefits. We want them to grow, and we are assuring them they won’t lose benefits. We will support them with sovereign guarantees, professional support, equity, and liquidity, so that they grow into becoming champions.
Other than that, I have committed to three major supports: liquidity, professional support, and equity. This is for new ones. We won’t let old MSMEs down either.
We will therefore also revive 200 legacy MSME clusters. One side (of the coin) is PLI-driven; on the other side, the government is investing.
Are these steps aimed at facilitating a structural democratisation of the economy? The Economic Survey had highlighted how “high protection” in upstream sectors (like textile fibres, steel and aluminium) are raising the costs for a larger set of firms engaged in export-oriented production…
Structural problems are already being addressed through reforms — easing regulations, soft-touch compliance, and reducing burdens. So there are many things that we are doing in terms of systemic problems. The focus is clearly on manufacturing, with big and small units to be in the stride.
Fiscal transparency and realistic revenue estimates have been the hallmark of your budgets. In FY26, however, the trend of steady rise in tax-GDP ratio has reversed. After the earlier GST and income tax reliefs, the Budget trimmed Customs tariffs, and large trade pacts will bring effective tariffs down further. With fiscal consolidation, the Budget size has come down from 13.9% of GDP to 13.6%. How quickly do you expect tax buoyancy to pick up over the medium term?
Customs duty never gave us huge revenues anyway. The GST revenues have risen again to `1.93 lakh crore (for January 2026). Refunds are low. If this continues, we may cross `2 lakh crore sooner. So, we cannot assume buoyancy won’t grow for the next two years.
The policy line is to keep tax rates benign, tax policy predictable and tax administration non-intrusive, but intensified tax effort might require a way to unlock huge funds (an amount equivalent to 60% of annual Budget) stuck in disputes. Are you planning any special scheme to realise more of the tax arrears?
I have already announced a scheme for assets that are abroad (Foreign Assets of Small Taxpayers – Disclosure Scheme 2026) to facilitate a time-bound scheme for declaration of foreign assets and foreign sourced income below certain thresholds). Other than that, nothing is under consideration now.
Critics say fiscal consolidation from 4.4% to 4.3% next year is too slow, and the Budget lacks a big-picture push…
Reforms don’t happen only through the Budget, they are continuous. So, the Budget need not be the only instrument or platform through which we got all this (strong macroeconomic fundamentals). Now, it happens even without it. If I were more aggressive on deficit reduction, the same critics would say I’m constricting growth. Revenue buoyancy will take a while to pick up because I have given `12 lakh (I-T exemption), GST cuts, and so on. I see signs of (revenue) improvement, but I must balance growth and fiscal discipline
The focus is on growth through manufacturing — big and small — through technology infusion, efficiency, skilling, education, health, and allied services. If growth is the priority, I cannot be excessively aggressive on fiscal tightening either. If my primary statement is that I have to take care of growth, how can I be even more ambitious about fiscal discipline?
After Covid, spending quality and cash management have improved, and created more fiscal space. Would there be a fresh attempt to rationalise fertiliser and food subsidies, the relentless rise of which are straining the fiscal capacity?
These are politically sensitive issues. There’s no way I will cut down on the support that we give to farmers. I will give it, because India’s food security is an important issue. I’m not talking about food security only for the public distribution system. India should not import basic grains, vegetables and fruits. We also have farmers who are sitting on fragmented holdings. They don’t cultivate on large estates where production can be scaled up. Such farming has to be sustainable. In fact, even large farms, beyond a point, are not sustainable.
The small ones may not be just subsistence farming, but the farmer depends on his labour, and he has to earn enough to run his family. So, food security in India has a very different, sacred dimension. While I won’t cut down anything to do with the farm sector, I can indeed be efficient about such spending.
Yes, we are looking at agri-stack — (digital foundation to enable roll-out of data centric digital services for agriculture) – along with another one being readied for fertilisers. The details are being worked out in such a way that the data stacks can talk to each other, so that the farmer who needs fertilisers will get it without having to face any shortage. We will also import fertilisers if required, and it would be made available to farmers. But, yet, we have to assess how much non-subsidised fertilisers will be needed in the country for the production of plywood etc. So, my subsidy element will have to be purely restricted to the genuine farmers. Good work is going on between the agriculture and fertiliser ministries. That will answer the points that you are raising.
Fertiliser subsidy outlay for FY27 is some `20,000 lower than the RE for FY26. Does this signal a plan to rationalise the scheme, which, apart from lowering input costs for farmers, seems to have also led to unintended outcomes like soil quality deterioration (due to overuse of subsidised farm nutrients), and distorted cropping patterns? Retail urea prices haven’t been hiked for years, and even for P&K fertilisers, the 2010 fixed-subsidy only remains on paper, and the sops continue to be open-ended..
When we say we will ensure supply of fertilisers to the farmers, it will also be important to see how much a farmer will need for his piece of land. Enough research has been done on per hectare usage of fertilisers for some crops, and nano-fertilisers for some other crops. There is enough knowledge on it. It is about how efficiently this can be converted to benefit the farmer in an environmentally sustainable fashion. In this regard, a lot of coordinated work is happening between the fertiliser ministry and the agriculture ministries. The idea is those sitting with robust data will have to talk to each other and come up with a formulation.
The cost of the free-ration scheme under the National Food Security Act is flaring up. The economic cost of PDS grains is being jacked up with grain stocks far in excess of the prescribed buffer being held. This imposes a disincentive on farmers against crop diversification, which is crucial to improve farm productivity and farmers’ incomes…
The buffer has to be determined by experts who monitor the national situation. It is not for us to depend on any imgained fixed number, and believe that grains being held are two times what is consumed through PDS. That is not the way to look at it. We had sufficient and more buffer to address the food security during the Covid period. We could manage with these stocks three years after that as well. There are emergencies in which sometimes we should err on the side of caution rather than be absolutely statistical about it.
Under the centrally sponsored schemes (where the Centre and states have funding obligations), actual spending turns out to be significantly below the Budget Estimates. Expenditure outlays under Central-sector schemes are however more accurate. Is this because of the lack of absorptive capacity of the states or a lack of willingness on their part to spend?
States can be more efficient in utilising the funds because now money doesn’t go to them in advance. It goes just in time. If they have spent it, they have to give their audited accounts or bills. If the utilisation certificate doesn’t reach us, we will treat it as money unspent.
You have proved critics wrong by enhancing the allocation for rural jobs guarantee scheme. With the enhanced funding obligation on the States of 40%, the whole programme has been given a leg-up…
The overhang of MGNREGA earlier has received `30,000 crore exclusively (for FY27). The G-RAM-G (the new version of MGNREGA) requirement came to around `95,000 crore, which is provided. MGNREGA with G-RAM-G put together got an outlay `1,20,000 crore. Let the leader of the opposition now stand up and say, you put the money where the mouth is. He won’t now talk about any of that.
The Congress party also alleged that the government is cutting the budget size, and not giving enough money to the states?
We allocate funds to the states that the Finance Commission has asked us to.
The 16th Finance Commission has done away with the revenue deficit grants, but at the same time, increased the allocation for the urban and rural local bodies. On a net basis, from the Centre’s perspective, is the Commission’s award a plus?
First, I want to put it on the table that I cannot critique the Finance Commission. It is a constitutional body, and it has given its report. The Cabinet has approved it, and we have taken its core recommendations. We will go by that. But the general tendency for commentators is to lament that the states have been denied revenue deficit grants. That money, however, has not come to (the Centre). What had to go through as a revenue deficit grant to the states, has not been given to the Centre instead. Instead, these funds have gone to the local bodies. In other words, the states are receiving it. The state governments may feel that the local bodies lay their hands on the funds, and not them. The Commission’s recommendations apply to the states as much to the Centre.
As regards the transfer to the states, the composition may have changed, but there has been a steady increase since 2019-20…
Therefore, this whole noise that some states make is that the Centre has too many cesses and surcharges, and that even that should be brought into the divisible tax pool is not correct. If more money is going to the states, why was the false narrative created that the Centre is taking away what should have otherwise come to the tax pool by levying surcharges and cesses? That’s been disproved.
The interest-free capex loans to the states is budgeted to rise by 39% to `2 lakh crore. Which are the new reform areas you want to promote under the scheme?
We may slightly increase the untied portion of the transfers so that states get flexibility and also reduce the number of categories of reforms. We should keep four or five conditions for reform. Each state can see which ones they can do, which they can’t, and take the tied portion as well. We will be working on it.
What is the broad message that this Budget has sent out to foreign investors? There is a sense of disappointment about the lack of bold reforms. We need capital…
Reforms are not being undertaken only through announcements made in the Budget. It continues throughout the year. We didn’t wait for the Budget to announce GST reforms. Labour Codes also were rolled out beyond the Budget. So, reforms take place throughout the year and, as and when the department is ready and clear about how to go about them, we announce them. They don’t wait for a Budget.
Could we expect more reforms like relaxations of the sectoral limits for FDI and FPI?
It depends on the respective departments. But in a majority of sectors, the limits have been relaxed.
In the Economic Survey, it was said that the borrowings, or the fiscal profligacy of the states, are leading to very high bond yields. Because of that, the Centre’s borrowing cost is also higher…
Using Article 293, we engage with the states on their borrowing limits and on their extra-budgetary borrowings. We have been actively talking to the states about restructuring their loans, because restructuring the borrowing is the one relief they can have in terms of the servicing cost of the loan itself. The amount of interest paid by some states are really high. Many states, not just BJP-ruled ones, but the Opposition-ruled ones also, approached us to have their borrowings restructured. In fact, one of the chief ministers did state in the state assembly that the Centre helped in restructuring the loan, and loan servicing stress has come down because of that. He, incidentally, doesn’t belomg to the BJP. We’re asking the states to sort this out.
But if we ask the states to improve fiscal discipline, some would say the Centre–state relationship has deteriorated. The RBI is sometimes seen as part of the Government of India, which it is not. It’s an independent body; it does its work. So, even for the RBI, if I can speak for them for a moment, there is only so much they can do, not beyond.
We are constantly talking with the states, particularly on extra-budgetary borrowings. We urge them to report (on off-budget borrowings) which is quite bad. You cannot go beyond 3% of GSDP in borrowing. We’ve done this for at least four states in the last five-year cycle.
Some of the well-intentioned initiatives announced in successive Budgets like the `1 lakh crore R&D Scheme to spur private-led innovation and the Prime Minister’s Internship Scheme haven’t gained much traction, and the funds are under-utilised. Has this something to do with the designing of these schemes as well, apart from stakeholder apathy?
We are learning lessons from each of the experiments. Two pilot projects have been done (on internship schemes), the third is running now, but we are going to the Cabinet for approval of the schemes.
Rupee has been weakening for a while, but has strengthened after the India-US trade deal. So, what kind of messaging is the government going to send on the weakening rupee, which can create a lot of problems going ahead?
The RBI has been intervening to contain the volatility of the currency. To a large extent, (the depreciation) also allows the rupee to find its own mark. So, we’ll have to watch it.
The bank deposit growth rate just doesn’t seem to be getting even to double digits on a sustained basis. If the credit flow doesn’t pick up, it will really not give the push that the economy needs. So, what can be done?
I can’t do anything in terms of giving (tax relief). Banks are trying and they should go back to deposit mobilisation. Some change is happening in the banks.
On this proposed banking reform panel, we had Narasimhan I, Narasimhan II, then PJ Nayak committees earlier. Why did you find the necessity of setting up another committee?
Some of their recommendations are periodically taken on board. But this is more for the Viksit Bharat objective. I’m asking the committee to look at what is needed for 2047. So we are talking from a position of strength. Earlier, the banks were not so strong when these committees were formed. But thanks to their recommendations, the banks have come into good health. So, the committee now essentially will have to tell us what it is that we have to do with the banking sector so that India’s growth and its objective of having to reach Vikasit Bharat can be served.
What is your view on giving foreign investors, strategic investors in banks, voting rights up to 49% from 26% now, irrespective of shareholding? Will that bring in even more capital?
We’ll have to see that. We don’t have a view on it at the moment.
The government has to take measures to boost non-tax revenues. Money from disinvestment can flow in if the government monetises equity in large listed CPSEs either by bringing the holding down to 26% or by privatising through offer for sale gradually. Will you address this upfront as we enter FY27?
We are looking into it.
Are you open to accepting the Economic Survey suggestion about redefining government companies to bring down stake to a strategic 26%?
I’ll have to see. It’s not necessary that we have to take that advice, but at the same time, if it has merit, we’ll have to assess it.
Has the process of merger or consolidation of public sector banks begun?
One of the points of rationalising PFC was that the synergy and efficiency would improve if they were merged. There have also been suggestions about whether they can be more efficient, staying where they are. A lot of discussion has happened with the department concerned.
Has the process of due diligence of the mergers of PSBs, and who will merge with whom started?
Nothing has really crystallised on that. That’s a decision we’ll have to see how it goes as we go on. Now that we will appoint a committee, I’ll also have to hear what they have to say in terms of banking for the future. What was already agreed to… That is very much on the same track.
Domestic savings are the mainstay for capital creation, but are muted. Some of the Budget measures would help generation of jobs and incomes and hence boost savings. No longer are savings promoted via tax incentives, and it’s been made much easier to withdraw money from the Employee Provident Fund. Doesn’t this policy need a rethink?
A little bit of a risk option is going to mutual funds and the stock market. People’s savings, per se, are not the ones that have come down. They are finding different baskets into which they are going. So, the same question repeats itself in the wake of every Budget . The data from the stock market, data on where people are holding, and unique DEMAT accounts are all coming out. But despite that, we only say that people are not going back to the post office. If money is going to the stock market, is it not helping capital formation?
Why not increase the capital gains tax on equities? The debt products because they are now taxed at the slab rate, and because the indexation benefit has gone, the fixed income products have become much less attractive. The arbitrage now is large..
People have moved from small savings in banks and post offices into the market. People want to make money from there, which we appreciate.In general, there’s a lot of concern about making high-risk activities like options and futures. That’s the limited place where we’ve tried to increase it in a small amount. But people are making and earning money out of capital gains. At this stage, many of them aren’t able to make good returns here. And that is why we have slightly raised the tax on the extremely risky futures and options, where it’s becoming equivalent to the satta market,with high levels of speculation. But we aren’t against people making money or earning better from their investments. We’ve not even thought of (increasing capital gains tax on equities). Do people need to make more money or not?
There is a view that the STT increase on F&O or the action that the government took on the e-gaming amounts to the government trying to be a moral guardian of society? A retail investor in a stock market does not have to be told that this is a risky investment…
We’re not touching the other STTs. It is only on the futures and options.
It is only this where lots of people have called us and to say, are you going to it and watch (speculation in F&O segment)?Many people have lost 90% of their money.
The flexible inflation targeting framework will be renewed by the end of March. How is it going to pan out? Will you continue with it?
It has done alright. That is why you are able to see in the last two years, inflation well under the limit. It’s served us well. We’ll see closer to the time (on continuation).
You said that it doesn’t have to wait for the Budget only for the government’s future actions on reform. What is your broad message to the investors outside?
This is the best place where demand is there, skilled workforce is there, institutions are all well laid out, there is stability from the government side — policy and tax stability. So, for China plus one, which is for the world’s benefit, we should be in India. In a way, it’s the best place in terms of return on investment. I’ve in the recent past heard Norwegian investors wanting to come to India, and funds want to come from Canada. In fact, I’m planning visits to Norway and Canada also. So, we will attract funds. And there is a realisation that India is the place to be. And we will only work to improve that. The EFTA countries are also very clear in sending messages that they want to come to India, they want to invest. They’ve given a promise of $100 billion. So, all that is well in the pipeline.
China and India’s contribution to world GDP growth is 23% and 17% respectively…
There is a realisation that these are two economies which are majorly growing and ignoring them or bypassing them is just not realistic.
Now that this US trade deal overhang is over, the prospects for next year will be better than projected?
We think the labour-intensive export sector will immediately derive benefit out of it. When the tariffs were increased, after a bit of an initial struggle, they found alternative markets. It’s actually benefited them to look at other markets as well. If you see their numbers, they are on the positive side despite the tariff. Now that that (US market) is also coming (back). And that 18% is far lesser than our competitors. These sectors will start to gain immediately. They will not let go of the new markets that they found. But they will go back to (the US market). Marine products, textiles, jewellery, leather, footwear, shrimp, all of them will do now.
India’s critical macro indicators — each one of them – are doing well.
After COVID, when many of us spoke about K-shaped or Y-shaped recovery and such, but look at the comprehensive span with which we are growing. It’s the result of hard work. And we will have to keep doing the work. But we have to be recognised — not the government, the people of India. Every family is struggling to somehow not miss the bus, invest in children, and invest in education. That’s why, in this Budget, we’ve even come up with education hubs. We’ll have to work to make them very flexible, so that instead of spending money and going abroad, you get that quality of degree here itself.
So, if the fundamentals are all strong, even compared to some of the well-advanced economies — some of them have huge problems with their foreign exchange, some have problems containing inflation — we are, across the board, fine. This tariff rate has come down. We find immediate relief coming to the export sectors, the sectors that we talked about. And investors are like weathercocks; they move in the direction of sentiment. Sentiments will change. Money flowing in will happen now, much more than earlier.
My fundamentals were fine even then. They booked their profit and went out. Net inflows didn’t happen despite the fundamentals remaining strong. My fundamentals are strong even now. But why do I think they will come? Because the ecosystem is changing.
Will India look at setting up a sovereign wealth fund like some countries have done, including Indonesia?
At the moment, we have no such plans. We’ll have to see this as we go about. It may be interesting for
India to have one. We’re not close-minded on that.
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