Will Budget 2026 Prioritize Growth or Tax Relief?

Will Budget 2026 Prioritize Growth or Tax Relief?

Developing countries often run fiscal deficit budgets. However, fiscal discipline is important to avoid excessive borrowing, which can cause inflation and instability in the currency. India is no exception. Fiscal discipline can be improved either by increasing revenues or by reducing and managing public expenditure more efficiently.

A fiscal deficit can lead to credit creation and may reflect a growing economy. However, it also has a direct link with inflation. A higher fiscal deficit increases inflationary pressures, as the government may rely on creating new money to finance the gap. One way to control inflation is to reduce the money supply. However, personal income tax cuts, like those seen in the recent budget, increase the amount of money in people’s hands. This can lead to a situation where more money chases fewer goods, pushing prices upward.

In a country like India, where there is a large middle class, this issue can become serious. Lowering personal income tax can reduce government income, which might make it borrow more to cover expenses. Therefore, the government must plan the budget carefully spending realistically and keeping revenue steady to avoid a big deficit.

Why Strong fiscal discipline is important?

Keeping strict control over fiscal discipline helps the government get better credit ratings for its bonds. Bad fiscal discipline makes managing debt harder. Organizations such as the IMF worry when a country’s debt is more than 100% of its GDP.

One major source of government revenue is direct taxes on people’s income. Data shows that personal income tax rates and tax collection often move in opposite directions. When tax rates and slabs are lower, more people are encouraged to file their tax returns. As more people file returns, the number of taxpayers increases, which can actually lead to higher overall tax revenue.

Cutting tax rates is always attractive, but whether the government should do it depends on its goals for the next five years and how much revenue it expects to earn.

For example, the RBI gave the government very high dividends in the last two years, which helped ease money problems, but this might not last.

Rather than cutting tax rates a lot, the government has tried to make taxes more taxpayer-friendly by adjusting slabs, increasing the exemption limit, or shifting from the old tax regime to the new one. In the past, governments have rarely changed the top tax rate, which has stayed around 30% for over 25 years.

At the same time, exemption limits and inflation have both increased. As a result, the middle class often sees little change in actual disposable income. Although the top tax rate has fallen from 40% in the late 1990s to 30% today, many middle-class taxpayers feel the real tax relief is not as big as it appears.

The challenge is finding the right balance. People shouldn’t feel overloaded by taxes, but the government still needs sufficient money to grow the economy by spending on infrastructures, schools, hospitals, and welfare, without relying too much on RBI dividends.