Budget 2025-26 maintains high Capex amid fiscal prudence: BoB analysis
The Union Budget for 2025-26 has maintained fiscal prudence without compromising on the quality of expenditure and the government’s borrowing program has been stable, which is positive for markets, according to an analysis by Bank of Baroda economists.
The analysis highlights that the momentum of capital expenditure (Capex) for large infrastructure projects in the highways, railways and ports sectors has been maintained in the Budget.
Apart from infrastructure, rural development and agriculture will be driving the growth in spending. The Centre’s overall expenditure is estimated to increase from Rs 47.2 lakh crore in FY25RE to Rs 50.7 lakh crore in FY26BE. This will be led by both, revenue and capital spending, the report states.
The Centre’s capex spending is expected to increase sharply to Rs 11.2 lakh crore from Rs 10.2 lakh crore as per FY25RE. As a percentage of GDP, the ratio of capex is retained at 3.1 per cent, the report states.
The government expects nominal GDP to rise by 10.1 per cent in FY26, recovering from 9.7 per cent growth in FY25 and the overall tax revenue-GDP is estimated to remain steady at 12 per cent in FY26 BE (budget estimate) versus 11.9 per cent in FY25 RE (revised estimate).
The direct tax-GDP ratio is expected to increase to 7.1 per cent from 6.9 per cent while the indirect tax-GDP ratio will remain stable at 4.9 per cent in FY26 BE, unchanged from FY25 RE, the report highlights.
In line with the fiscal glide path outlined in the Budget for 2021-22, the fiscal deficit (as a percentage of GDP) was lower in FY25 and will be brought down by another 0.40 per cent in FY26.
The government has also lowered its debt-GDP ratio from 58.1 per cent in FY24RE to 57.1 per cent in FY25RE. In FY26BE this is estimated to come down further, to 56.1 per cent.
By 2031, the government plans to lower its debt-GDP ratio below 50 per cent, as recommended by the 16th Finance Commission.
The report also states that the size of the budget has seen a steady increase over the past few years, with growth averaging around 7.6 per cent over the last five years, compared with average nominal GDP growth of 12.5 per cent. The increased size is keeping in mind improving the quality of spending.
The Centre’s net revenue collections are estimated to come in line with growth in nominal GDP. On a net basis, revenue collections are estimated to increase by Rs 3.3 lakh crore this year while Gross tax collections are estimated to register a significant incremental improvement in FY26BE (Rs 4.2 lakh cr) compared with last year (Rs 3.9 lakh cr). This is driven by an increase in corporate tax receipts and indirect tax collections.
The report also points out that the incremental increase in income tax collections will be lower, as the government has decided to forego Rs 1 lakh crore as a tax rebate.
Indirect tax collections are also projected to increase, albeit slightly at a slower pace compared with direct taxes, of the incremental Rs 1.33 lakh crore increase that is expected over the previous year, as much as Rs 1.16 lakh crore will be on account of GST collections alone. The increased compliance and prospects of higher domestic consumption will be the key drivers.
Within excise, agriculture infrastructure and development cess, duty on petrol and diesel and basic excise duties will gain momentum, the report said.
The Union Budget for FY26 outlines employment, skilling, agriculture, MSMEs, women, infrastructure and space technology as key areas where the government will be focusing in the next five years.
