Finance Minister Nirmala Sitharaman’s tenure is described as one that brought India out of the shock of a once-in-a-century pandemic. In the Budgets she presented after the Covid-19 crisis, she made sure that the country’s growth story remained alive by pumping up capital expenditure while keeping the government’s balance sheet in check through a significant reduction in the fiscal deficit.
The recovery since then has been so impressive that the Narendra Modi government keeps on boldly claiming that India is set to become a developed country, or a Viksit Bharat, by 2047.
But as each year passes, and with Sitharaman having presented her ninth consecutive Budget this year, the realities of that promise are beginning to become more apparent.
3 February 2026
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Growth Pangs
This year’s Budget was presented against the backdrop of an increasingly uncertain global environment. The Economic Survey, which was released a few days ahead of the Budget, projected India’s real GDP growth for 2026–27 in the range of 6.8–7.2%.
While this may appear encouraging amid a fragmented global trade order, the projection comes after a year of tax cuts and monetary easing by the central bank. And the projection remains broadly in line with the growth rates India has been achieving in recent years.
More importantly, it falls short of the Survey’s earlier projection that India would need an annual average growth rate of around 8% to meet its long-term ambitions. “To realise its economic aspirations of becoming Viksit Bharat by the time of the centenary of independence, India needs to achieve a growth rate of around 8% at constant prices, on average, for about a decade or two,” last year’s Economic Survey had noted.
Responding to this shortfall, Department of Economic Affairs (DEA) Secretary Anuradha Thakur says, “Right now, we would definitely like to overachieve, especially given that our economy relies heavily on domestic consumption.”
“In that context, many action points have already been implemented through reforms and government schemes highlighted in this Budget,” she adds.
Even if one assumes that the survey’s projection for the next year’s real GDP growth is a conservative one and that the Centre’s continued thrust on capital expenditure—alongside new announcements for data centres and MSMEs, among others—has the potential to turn things around, researchers are now pointing to an even more troubling reality. In a recent study titled 'Investments, Human Capital Formation and Productivity Growth Targeting Viksit Bharat', economists Dibyendu Maiti—of the Delhi School of Economics, which has been praised by the finance minister herself—and Bishwanath Goldar of the Institute of Economic Growth, argue that as the Indian economy develops, its growth rate may decelerate over time.
Therefore, to attain an average growth of 8% over the next 23 years, the Indian economy may need to grow at around 10% annually over the next decade.
The study notes that South Korea achieved the annual GDP growth of around 10% between 1981 and 1991, before its growth slowed in subsequent years. China’s GDP growth, too, accelerated over time, exceeding 9% annually between 2002 and 2010, before moderating significantly.
“Considering these experiences, it seems that an average annual growth rate of GDP of 10% over an 8–10-year period is not unattainable. It is also evident that a high growth rate is hard to sustain,” the study notes.
Expenditure Problem
There is a broad consensus that India’s current growth momentum, even if below potential, continues to be largely driven by the finance ministry’s capital expenditure push and its multiplier effect.
Corporate leaders, too, have repeatedly argued that sustained public investment in infrastructure is essential to crowd in private investment and encourage them to deploy their own capital.
Ministry officials and the Budget’s architects claim that private investments are now beginning to pick up. This assumes significance in the context of the corporate investment-to-GDP ratio that has remained largely stagnant despite generous corporate-tax cuts, keeping India’s overall investment-to-GDP ratio distinctly lower than that of many upper-income economies.
But this is only half of it. While the Centre has steadily raised budgetary allocations for physical infrastructure, there has been no comparable increase in spending on human capital.
Here, responsibility also lies with state governments, many of which have prioritised cash transfers over investments in physical and human capital—a trend also flagged in this year’s Economic Survey. At the same time, these cash transfers have proved electorally rewarding for the ruling National Democratic Alliance, helping explain why the Centre has found little room to take any concrete measure.
One would be severely mistaken to believe that physical investments alone will suffice for achieving high-income or even upper-middle-income status.
Human-capital investments, economists argue, will be just as critical. “Until TFP [total factor productivity] growth and human capital formation [educational level] accelerate, whether the investment rate remains at 33% or increases over time to reach 40% by 2047 does not make a big difference to the targeted growth path,” Maiti and Goldar note in their study.
A 'Boring' Budget
So far, Sitharaman’s Budgets have largely failed to stimulate any significant human-capital formation or productivity growth. In that sense, many critics this year described the Budget as “boring” and “forgettable”, its key announcements overshadowed in the media by developments around the India–US trade deal.
Earlier budgetary measures aimed at labour productivity such as the employment-linked incentive schemes and the PM Internship Scheme, for instance, are now also widely seen as half-hearted interventions that were predicted to fall short even at the time of their announcement.
And to make matters worse, government spending—even with relatively low investments in education and health—is set to come under severe pressure in the years ahead.
The Centre has acknowledged the need to bring down its debt from the current 56% of GDP to around 50% of GDP by 2030–31. However, this target comes against the backdrop of the 16th Finance Commission’s suggestion that the Centre reduce its fiscal deficit to 3.5% of GDP by the same year.
What makes this particularly interesting is that Sitharaman has already been forced to slow the pace of fiscal consolidation, targeting a fiscal deficit of 4.3% of GDP for 2026–27, only marginally lower than the 4.4% achieved in 2025–26.
DEA Secretary Thakur says the Centre will continue to use the debt-to-GDP ratio as its primary metric for fiscal prudence, with the fiscal deficit now only serving as the operational tool to achieve it. “We will stay with it,” she says.
This approach, notably, is meant to preserve room to support the economy against newer challenges as seen through the significant hike in the defence budget. But it also essentially means the government is struggling to generate enough revenue to sustain both high capital expenditure and a credible path of fiscal consolidation—the two defining features of Sitharaman’s post-pandemic Budgets. This, in turn, reduces the possibility of any meaningful increase in investments in human capital or productivity.
Revenue Problem
It is perhaps ironic that Sitharaman, often criticised by millions on social media as a merciless finance minister when it comes to taxation, operates with a relatively lighter wallet than many of her counterparts in economies of comparable size and population, with India’s government revenue as a share of GDP remaining significantly lower.
Among her few sources of relief in this regard have been the dividends from the Reserve Bank of India (RBI).
RBI Governor Sanjay Malhotra, who earlier served as the revenue secretary in the finance ministry, had explained this rather simply when asked about the Centre’s success in reducing the fiscal deficit. “The reduction is primarily due to the higher-than-budgeted dividend coming in from the RBI. This has been the main contributing factor. Other revenues are increasing only very marginally, so they do not significantly contribute to the reduction,” Malhotra told Outlook Business in a post-Budget interview in 2024.
Be it leakages in India’s tax system or the so far faltering disinvestment programme, the central government has not been able to meaningfully expand its revenue base. It is not surprising then that despite repeated misses, the Budget has set a target of ₹80,000 crore from disinvestment and asset monetisation, a 135% year-on-year increase.
But until there is a significant improvement in tax revenue buoyancy or large-scale privatisation, one cannot hope for a reversal of fortunes.
This limitation explains why there is no clear intent to meet either the Fiscal Responsibility and Budget Management (FRBM) target of a fiscal deficit of 3% of GDP or the Finance Commission’s suggested level of 3.5%.
Perhaps it is safe to say that a poor finance minister can never make the country rich. The growth story that Sitharaman has kept alive after the pandemic shock now demands far greater resources. Her Budgets, however, appear to be running out of fuel, if not intent, to deliver on the promise her prime minister has made to the nation.
Note: The Economic Survey’s growth projection for FY27 was revised upward to 7–7.4% under the new GDP series by the time this story went to press. India's nominal GDP, fiscal deficit and debt-to-GDP ratio were also revised.
