The budget was presented against a macro backdrop shaped by several opposing forces. Supportive measures in 2025 - including GST and I-T cuts, monetary and regulatory easing, lower crude prices, and a strong monsoon - have driven a cyclical recovery. However, as these temporary boosts fade, demand will need to shift more sustainably toward GoI infrastructure spending and real estate, both of which are now slowing after several years of rapid growth.

And herein lies the rub. Corporate investment has flatlined at around 12% GDP since FY13. Over these years, a series of cyclical headwinds from demonetisation, GST rollout problems to bad debt in banks have been proffered as underlying causes. After 15-odd yrs, it is time to acknowledge that the culprits behind the malaise are structural and not cyclical.

The pop up in private consumption after GST rate cuts is a good sign. But the level of consumption still lies well below that implied by its pre-pandemic trend, and it is mirrored by a similar-sized gap in real household earnings. As some of us warned in 2020, the pandemic - without sufficient fiscal support - would leave lasting scars on household balance sheets and consumption. It has.

Anachronistic statistical methods continue to obscure estimates of real GDP growth, while slowing nominal growth and 25 mths of falling core inflation (excluding gold) signal persistent, and possibly widening, excess capacity. Policymakers have responded by rationalising GST, implementing new labour codes and creating the framework for deregulation. While these reforms mark progress, their scale seems modest when set against the entrenched challenges faced by private consumption and investment.

India also faces significant trade and technology-related uncertainty on the external front. The country has managed to soften the blow from steep 50% US tariffs by tapping into alternative markets. Now, all eyes are on the US Supreme Court, which is expected to rule soon on the legality of IEEPA (International Emergency Economic Powers Act) tariffs - the mechanism used by the US administration to impose 'reciprocal' duties on India and other nations. If the court strikes down these tariffs, as suggested by the tenor of recent hearings, the administration is likely to pivot to other
Congressional tools, such as Sections 122, 301 and 232 of existing trade legislation.

Because current trade deals have not been formalised as permanent agreements, they are likely to be renegotiated under these new provisions, a process that will take time and add to the prevailing uncertainty. In the interim, Indian exports may see a brief uptick as US importers rush to front-load shipments. However, with tariffs likely to be reimposed, any lasting resolution to the US-India trade standoff will be further delayed.

While the US and several Asian economies are capitalising on a surge in AI-driven investment and growth, India is struggling to keep pace. The country lags in every segment of the AI value chain - from upstream chip manufacturing to midstream large language models and data centres, to downstream AI applications.

Compounding these challenges, India's software services exports face not only the threat of AI-led job displacement but also new restrictions on H-1B visas to the US. The FY27 budget's proposed tax incentives for data centres may help over time lower costs and spur investment in homegrown AI applications. Still, the prevailing sentiment is that India remains behind in the global AI race.

Combination of these concerns has prompted foreign investors to rethink their exposure to India, triggering a sharp reversal in capital flows. This shift has made it challenging to finance even a modest CAD of 1% of GDP and has put downward pressure on the currency. In response, RBI has intervened heavily in the forex market, but these actions have drained domestic liquidity. As a result, lending rates have climbed, despite a recent 75 bps cut in policy rates.

Against such a cloudy background, the FY27 budget chose to tread the path of the straight and narrow. Continuing the fiscal consolidation of the past 3 yrs, GoI set a fiscal deficit target of 4.3% of GDP, a slight reduction from this year's 4.4%. Achieving this goal, however, hinges on whether nominal GDP growth rebounds to the projected 10% - a key driver of tax revenue. If growth falls short, meeting the deficit target could prove challenging. The budget also introduced a smorgasbord of tax and regulatory changes, whose overall macroeconomic impact is hard to assess.

With the budget over, attention will shift to whether the government follows through on the deregulation and reform agenda outlined in Economic Survey, and if it can deliver on the hopes it has raised.