Centre Enters FY26 with Fiscal Prudence Despite Global Headwinds

While supply-side stresses are becoming increasingly evident, the report said demand conditions in March, as evident from retail vehicle sales as well as tractor sales, still appear reasonably robust. "Looking ahead, demand conditions and economic activity will be influenced by emerging pressures stemming from rising input prices and supply chain constraints. However, as the fragile peace in the Middle East holds on with the ceasefire, we expect the situation to improve in H2 of 2026," it added.

The review cautioned that as the evolving West Asia conflict begins to exert pressure on economic activity, it will have direct implications for both revenue realisation and expenditure commitments in 2026-27. It also called for an assessment of fiscal position of states, given their critical role in aggregate public spending.

"Notwithstanding these emerging headwinds, the Centre enters the fiscal year from a position of relative prudence. The fiscal consolidation path adhered to in recent years, coupled with the Budget's conservative assumption of a gross tax revenue buoyancy of 0.8, which is below the historical average, and the creation of an Economic Stabilisation Fund in the public account, provides room for fiscal interventions," the review observes.

However, the review also flags the risk of uncertainty in energy and fertiliser supplies in case the Middle East conflict gets prolonged . Risks are tilted to the upside for inflation, fiscal and external deficits and to the downside for economic growth. However, while striving to sustain economic growth, policy is expected to safeguard medium-term fiscal and external stability, it added.

Citing external sector trends, the review noted that India's merchandise trade deficit widened to $333.2 billion in FY26 from $283.5 billion in FY25, while the overall trade deficit rose to $119.3 billion from $94.7 billion during the same period. "The pattern is likely to persist in FY27, with even wider deficits, alongside a higher current account deficit," it said.

While describing the recent pickup in gross foreign direct investment (FDI) inflows as encouraging, the review warned that the global environment was becoming more competitive. "Countries are increasingly weaponising supply chains and investment flows, making relocation decisions more complex for businesses," it said.

India's task is cut out, and a coordinated push is required across agencies to attract capital flows through stable tax policies, improved logistics, better urban liveability, stronger research and innovation ecosystems, and a skilled and healthy workforce, it observes.

Among other reforms, the review said the domestic decriminalisation and deregulation agenda should not be held back due to global uncertainties, adding that regulatory simplification - particularly steps that lower the cost of imports and exports - would be "especially valuable in these times".

As far as the farm sector is concerned, the review sees this as the ideal time to implement long-overdue policies that remove distorted crop choices and improve agricultural productivity. In India, the forecast of a below-normal, spatially uneven monsoon, due to the El Nino effect, underscores the urgency of getting agricultural and water policies right, it added.

The review also highlights that boosting AI-insulated, durable trade skills among the youth will support domestic manufacturing and services while creating export opportunities.

- IANS