Whalesbook
The Seamless Link
This budget's focus departs from critical economic imperatives, instead amplifying existing strains on fiscal federalism and governance. It sidesteps pressing issues such as widening inequality, a persistent employment crisis, and sluggish private investment, suggesting a strategy rooted in narrative management rather than deep-seated reform.
Economic Priorities Sidestepped
The current economic juncture is marked by deep-seated challenges, including stark increases in inequality which dampen consumption demand, a severe employment crisis manifesting in stagnant real wages and youth unemployment, and consequently, subdued private investment across sectors. Economists argue that addressing these requires robust public spending in health, education, and rural development, alongside proactive employment generation policies and substantial support for Micro, Small, and Medium Enterprises (MSMEs). However, this budget offers little by way of such interventions. Instead, the fiscal direction appears to move towards centralisation, with a notable partisan approach towards state governments, exacerbating the economic disquiet.
Fiscal Federalism Under Pressure
A significant feature of the budget is its reinforcement of fiscal centralisation. While the 14th Finance Commission had recommended increasing states' share in divisible taxes to 42%, the Centre has effectively circumvented this by increasing non-sharable cesses and surcharges, reducing states' effective share. Data from the Union Budget 2025-26 indicates that when central tax revenues fall short, a primary response is to cut grants-in-aid and centrally-sponsored schemes, bolstering central finances but straining state budgets. For instance, a revenue shortfall of Rs 162,748 crore in revised estimates has led to substantial cuts in grants and scheme funding, forcing states, already burdened by GST and regulatory constraints, to absorb the impact. Furthermore, unilateral decisions like the corporate tax rate cut in 2019, which led to significant revenue loss, were made without adequate consultation, leaving states to bear revenue shortfalls without compensation. The 16th Finance Commission's recommendations, retaining states' share at 41% and ending revenue deficit grants, signal a move towards compliance-driven federalism and potentially stricter fiscal discipline for states.
Shifting Employment Landscape
The budget introduces the Viksit Bharat-Guarantee for Rozgar and Ajeevika Mission (Gramin) Act (VB-G RAM G), which replaces MGNREGA. While the new scheme guarantees 125 days of employment, it fundamentally alters the funding structure. The Centre's contribution is reduced to 60%, with states now required to bear 40% of the costs, a significant departure from MGNREGA's near-100% central funding for unskilled wages. This shift places a considerable financial burden on states, particularly those with high demand for employment and limited fiscal capacity. The allocation for VB-G RAM G stands at Rs 95,692 crore, a substantial increase, while MGNREGA's allocation has been drastically reduced to Rs 30,000 crore for 2026-27, highlighting a strategic pivot away from the rights-based, demand-driven nature of the original scheme towards a supply-driven model heavily reliant on central budgetary limits and state contributions. Experts warn this could lead to tighter caps on work generation and reduce the scheme's reach.
Narrative Control Over Governance
This budget reflects a consistent government approach that prioritizes optics and narrative control over substantive policy action. Expert analyses suggest a pattern of using self-congratulatory assessments based on selective data in official documents, while actively denying inconvenient economic realities. This strategy, while effective for political messaging, is considered detrimental to good governance and addressing the nation's fundamental economic imbalances.