Why Union Budget 2027-28 should focus on resilience and reform

The global environment calls for vigil. Brent crude oil was about $70 a barrel before the West Asia war began in late February and rose above $115 after September’s East-West pipeline shutdown. Political uncertainty in the US has also grown: with the opposition set to control both houses of Congress, policy on issues key to India, including the war, tariffs and trade deals, is less predictable.

At home, the external shock shows up in three places. Headline inflation in September was 2.8 percentage points higher than in January, and above the Reserve Bank of India’s (RBI) 4% target. Foreign portfolio investors have been net sellers in most of this year, and the rupee slid to about 95 to the dollar. And the fiscal arithmetic has changed.

Estimates by Ashoka’s Isaac Centre for Public Policy (ICPP) help size the challenge. If energy disruption lasts until December, lower excise collections, higher fertilizer and liquified petroleum gas subsidies and smaller oil-company dividends can push the 2026-27 fiscal deficit to about 4.86% of GDP, against a target of 4.3%, equivalent to a slippage of ₹2.4 trillion. If it lasts until March 2027, the deficit can jump to 4.94%.

The budget can turn this into an opportunity. Recognizing the war-related overshoot as a one-off while protecting capital expenditure would preserve the public spending that crowds-in private investment.

The government’s reaffirmed debt anchor of 50% of GDP by 2030-31 should also reassure markets, which matters more now that India is part of global bond indices. Rating agencies weigh debt heavily and higher tax revenue along with a full disclosure of contingent liabilities would strengthen India’s case for an upgrade.

The Centre could nudge the states towards a common framework for using GST data and simplifying compliance, widening their tax base. States too could share GST revenues with urban local bodies, which gave up octroi under GST.

Shocks are now more frequent. Foreign exchange reserves, though drawn on to steady the rupee, are adequate by most measures, including ICPP estimates; But India’s strategic oil reserves cover just about 5 days of net imports, and 26 with commercial stocks, short of the International Energy Agency’s 90-day benchmark. Expanding them, and hedging part of the government’s oil exposure as insurance, would cushion the next shock.

India’s Viksit Bharat aim rests on two goals: a high-income economy and a larger number of good jobs.

First, at recent trend growth in per-capita dollar income, India would reach the World Bank’s high-income threshold well beyond 2047. Getting there by 2047 needs close to 8% a year real GDP growth sustained for two decades.

The second is even more challenging and makes job-rich growth imperative. The latest Periodic Labour Force Survey shows unemployment among 15-29-year-olds at 16%, three times the overall rate, and 18% among urban youth. Yet, manufacturing, the classic jobs engine, has stayed at 15-16% of gross value added for a decade. Since 2000, exports have shifted from textiles and clothing towards capital-intensive machinery.

A proactive effort to rebalance towards labour-intensive sectors would play to India’s comparative advantage and create more jobs; rising automation in global manufacturing makes this more urgent.

Data on listed and unlisted companies point to robust growth in private corporate capital expenditure. Net foreign direct investment is rising from a low base, though only about a fifth of gross inflows go to manufacturing. Partnerships such as Japan’s 10 trillion yen investment pledge can help if foreign plants set root in Indian supplier networks.

The budget should first tilt incentives towards employment in sectors such as apparel, footwear, leather, food processing and electronics assembly.

Second, rationalize tariffs on intermediate inputs and cut the time, cost, complexity and uncertainty of moving goods across borders, embedding Indian firms in global value chains; a logistics cost index for Exim trade being built by the ministry of ports, shipping and waterways with ICPP can complement the National Time Release Study in tracking progress.

Third, prioritize tax stability, certainty of interpretation through advance rulings, faster dispute resolution through new bilateral investment treaties, and state-level implementation of the labour codes.

Fourth, help firms, especially smaller ones, seize the opportunities opened by India’s new free trade and economic partnership agreements.

Fifth, ease tax compliance for foreign portfolio investors: the bank that already acts as an authorized dealer and custodian could compute, pay and report the investor’s tax.

Sixth, mobilize idle household gold, some 35,000 tonnes. Drawing on cross-country experience, RBI could incentivize banks by letting them hold part of their reserve requirements in recycled gold, with the mobilized metal lent to jewellers and manufacturers.

Unlike oil, where India is a major exporter of refined products, its gold refineries run at under half their roughly 1,800-tonne capacity. Feeding them recycled gold would cut imports and lift exports. ICPP research adds a safeguard: modest yields, short tenures and eligibility screens, so deposits do not induce fresh purchases.

Finally, play to strengths. Services trade now exceeds 15% of GDP, India’s workforce is far less exposed to AI substitution than that of advanced economies, and the demographic window is still open. Prioritizing skill development and services exports can unlock the true value of trade deals.

In an uncertain world, two priorities hold: cushioning the economy against shocks and making growth job-rich. The budget can deliver on both.

The author is dean of Ashoka School of Economics and Finance, director and head of Ashoka Isaac Centre for Public Policy (ICPP), and professor of economics at Ashoka University