According to an analysis by economists at Bank of Baroda, the Union Budget for 2025-26 has struck a balance between fiscal prudence and the quality of expenditures, with the government’s borrowing program remaining stable—an encouraging sign for market outlooks.The analysis points out that the capital expenditure (Capex) momentum for major infrastructure projects in the highways, railways, and ports sectors has been effectively sustained within the Budget.

Additionally, spending growth will be significantly driven by rural development and agriculture. The Centre’s total expenditure is projected to rise from Rs 47.2 lakh crore in FY25 (Revised Estimates, RE) to Rs 50.7 lakh crore in FY26 (Budget Estimates, BE). This growth will be supported by both revenue and capital expenditures, as stated in the report.

Capex is anticipated to see a notable increase to Rs 11.2 lakh crore—up from Rs 10.2 lakh crore in FY25 RE. The ratio of Capex to GDP is set to remain steady at 3.1 percent, according to the report.

The government projects a nominal GDP growth of 10.1 percent in FY26, up from a revised estimate of 9.7 percent for FY25. The overall tax revenue as a percentage of GDP is expected to hold steady at 12 percent in FY26 BE compared to 11.9 percent in FY25 RE.

The direct tax-GDP ratio is forecasted to rise to 7.1 percent from 6.9 percent, while the indirect tax-GDP ratio is anticipated to remain constant at 4.9 percent in FY26 BE, unchanged from FY25 RE.

Following the fiscal glide path laid out in the Budget for 2021-22, the fiscal deficit (as a percentage of GDP) has decreased in FY25 and is projected to decrease by another 0.40 percent in FY26.

The government has also reduced its debt-to-GDP ratio from 58.1 percent in FY24 RE to 57.1 percent in FY25 RE, with further expectations of a decline to 56.1 percent in FY26 BE. By 2031, the government aims to bring this ratio down below 50 percent, in line with recommendations from the 16th Finance Commission.

The report notes a consistent increase in the size of the budget over recent years, averaging a growth rate of approximately 7.6 percent over the last five years, against an average nominal GDP growth of 12.5 percent. This budgetary increase is focused on enhancing the quality of spending.

The Centre’s net revenue collections are projected to align with the growth in nominal GDP, with an increase of Rs 3.3 lakh crore expected this year. Gross tax collections are also anticipated to show significant growth in FY26 BE (Rs 4.2 lakh crore) compared to the previous year’s figure of Rs 3.9 lakh crore, driven by higher corporate tax receipts and indirect tax collections.

However, the report highlights that the incremental rise in income tax collections will be less substantial as the government has opted to forgo Rs 1 lakh crore in tax rebates.

Indirect tax collections are expected to grow at a slightly slower rate than direct taxes, with an overall expected increase of Rs 1.33 lakh crore. Of this, Rs 1.16 lakh crore will come solely from GST collections. Improving compliance and the potential for higher domestic consumption will be key factors in this growth.

Specific areas within excise, such as agriculture infrastructure and development cess, as well as duties on petrol, diesel, and basic excise taxes, are anticipated to gain traction, according to the report.

The Union Budget for FY26 emphasizes employment, skill development, agriculture, MSMEs, women’s initiatives, infrastructure, and space technology as primary focus areas for government efforts over the next five years.