WHAT IS COMMON between the Union Budgets tabled in 1997, 2004, 2007, and the upcoming one? Two things. First, like the Budgets mentioned, Budget 2026 will be tabled in the backdrop of the ‘Goldilocks’ moment — the ideal porridge of high economic growth, low inflation, a supportive monetary policy, and overall macroeconomic stability.

The Indian economy gained momentum in the years following the 1991 liberalisation, with GDP growth rising from 1.1% in 1991 to 7.5% in 1996, according to World Bank. Similarly, in 2004 and 2007, GDP growth was buoyant at 7.9% and 7.7%, respectively, compared with a mere 3.8% in 2000, on the back of massive expenditure on infrastructure, specifically the Golden Quadrilateral project to build highways, announced by the Atal Bihari Vajpayee government in 1999.

And across all the above time frames, prices remained on a leash, with inflation based on the consumer price index (CPI) at 7.7% in 1997, 3.8% in 2004, and 6.4% in 2007 — quite normal for a developing economy.

A similar situation is playing out now. The GDP growth in Q2FY26 is at 8.2%, and retail inflation has hit a series-low of 0.71% in November, as finance minister Nirmala Sitharaman prepares her ninth consecutive Union Budget.

Second, while the macroeconomy looks upbeat, India’s macroeconomic challenges remain the same. Jobs, per capita income, and poverty continue to be challenges as are equitable growth, infrastructure deficit, railway reforms, court reforms, and addressing the education and healthcare gap, especially in the hinterlands, despite the progress made. The terrain of the VUCA (volatile, uncertain, complex and ambiguous) world, is increasingly getting more challenging for policymakers. The Trump administration’s penal tariffs continue, while the U.S.-India trade deal is still in limbo. India’s concessional Russian crude oil pipeline has been severed, and security challenges linger with new warfare techniques involving drones, witnessed in the India-Pakistan conflict in May 2025.

How the Goldilocks moment came about

That said, India’s economic momentum, which began in Q4FY25, with GDP growth at 7.4%, continued through the current fiscal, breaching 8% in the July-September quarter, up from 5.8% year-on-year. Reforms such as the rationalisation of direct taxes and GST, a new labour code, and a slew of free trade agreements (the U.K., Oman, and New Zealand) are expected to provide a fillip to the economy.

As the overall prospects look good with retail inflation under control, lower GST rates translating into higher consumption, and monetary policy expected to be supportive of growth, the GDP projections are being revised upwards.

The government’s chief economic adviser, V. Anantha Nageswaran, addressing the media on the day the GDP data for Q2FY26 was released, said GDP growth in the current financial year may exceed earlier estimates, breaching 7%.

The Economic Survey, which reports on performance in the preceding fiscal, had expected 2025-26 to end with GDP growth between 6.3-6.8%. “The overall picture looks like a steady growth in Q3, too. We can confidently say that the full-year growth will be north of 7%. It will be over 7%, rather than being south of it,” Nageswaran had said.

The Reserve Bank of India (RBI) has upgraded its FY26 GDP growth forecast to 7.3% from 6.8%, and lowered its FY26 CPI inflation forecast to 2% from 2.6%. “Overall, real GDP growth is poised to exceed 7%, much above our expectation of 6.5% at the beginning of the year, as healthy domestic prospects outweigh the concerns on the external front,” RBI governor Sanjay Malhotra pointed out in the Monetary Policy Committee meeting in December, according to the minutes released on December 19. “Going forward in H1 next year, domestic growth is projected to remain strong, though moderate to 6.7-6.8%,” he said. In his statement, MPC member Nagesh Kumar referred to this “Goldilocks moment” but pointed out the celebrations were tempered a few days later when October trends came in.

A series of ratings upgrades

However, on the back of a series of reforms and buoyant headline numbers, India has received three consecutive rating upgrades this financial year from major agencies — Morningstar DBRS, S&P Global, and Japan’s Rating & Investment Information (R&I). R&I’s upgrade of India’s long-term sovereign credit rating to ‘BBB+’ (stable) from ‘BBB’ and the retention of the “stable” outlook for the economy were the most recent. This follows S&P’s upgrade to ‘BBB’ (from BBB-) in August this year and Morningstar DBRS’s upgrade to ‘BBB’ from BBB (low) in May.

Three consecutive rating upgrades within five months are unprecedented and reflect India’s recognition as a resilient, robust economy. Moody’s Ratings did not issue an upgrade but affirmed India’s long-term local and foreign-currency sovereign ratings and retained its “stable” outlook. It cited sustained strength in the economy and reliable deficit funding. In August, Fitch Ratings affirmed India’s credit rating at ‘BBB-’ with a stable outlook.

Rupee, inflation still remain hurdles

So the macro backdrop for the next Budget is undoubtedly robust compared with last year, when the economy faced severe headwinds. In the second quarter of FY25, India’s GDP growth slumped to a seven-quarter low, while inflation remained above 5.5%, leaving little monetary policy headroom to spur economic growth. Consumption, exports, and private investment, too, had taken a back seat.

Nonetheless, pockets of concern continue to persist. For the first time, the rupee fell below 90 to the dollar, core inflation remains elevated, the Index of Industrial Production (IIP) nosedived till October but rebounded with 6.7% growth in November. In addition is the pall of gloom cast by the geopolitical situation and the tariff war set off by the U.S.

The government may face fiscal constraints in making big-ticket projections in Budget 2026, as lower-than-expected nominal GDP growth in the current financial year is likely to reduce tax collections. Budget 2025 made its revenue projections on the assumption of a nominal GDP growth rate of 10.1%. However, with near-zero inflation and nominal GDP growth of 8.7% in Q2FY26, revenue calculations and fiscal management may become challenging.

Challenges persist on the tax front

The net direct tax collections till December 17 totalled ₹17.05 lakh crore, a growth of 8% over the ₹15.78 lakh crore reported for the same period in the previous financial year, according to data from the ministry of finance. Gross tax collections, before refunds, increased by 4.16% year-on-year to ₹20.02 lakh crore.

But seen in the context of the direct tax revenue mop-up in the comparable period of growth in previous years, it is evident that a lot of ground needs to be covered. The government has already indicated that the net revenue loss due to the GST cuts will be ₹48,000 crore, even as it prefers calling it revenue “implication”.

Gross direct tax revenue growth in FY25, as of December 17, was 20.32%, while the net tax collection growth was 16.45%, over the same period in the previous fiscal, according to data from the income tax department. During April-December in FY24, gross direct tax collections had grown by 17.01%, while net direct tax collections grew 20.66% over the same period of the previous financial year.

Refunds grew 42.5% during April-December 2024 but contracted by 13.52% till December 2025, according to the department. If the refunds had not been lower, net direct tax revenue would have been lower than reported. Meanwhile, ICRA anticipates a shortfall of ₹1.5 lakh crore in the Centre’s gross tax revenues against the Budget Estimate for the current fiscal. Direct tax revenue growth is declining, and it remains to be seen how much pressure it will exert on the government’s fiscal deficit target of 4.4%. Notably, the April-November fiscal deficit touched 63% of the FY26 Budget Estimate at ₹9.76 lakh crore, compared with 53% in the corresponding period of the previous fiscal, data from the government reveals.

IIP, exports a concern, says Reserve Bank

So, while the Goldilocks moment is playing out on the GDP growth and inflation front, is it really all-encompassing? RBI MPC’s Kumar mentions that the party has been “tempered by the trends” in October.

The MPC minutes quote Kumar as saying that industrial activity, as measured by the Index of Industrial Production, began losing momentum in October 2025, reaching a 14-month low. The high-frequency indicators, such as the manufacturing PMI, dropped from 59.2 to 56.6. Despite the IIP rebound in November, brokerages are of the view that the 4% IIP growth pegged for FY26 will be weaker than the previous year.

Kumar noted that merchandise exports declined by around 12% further in October 2025. Export orders were at their weakest, bringing the New Orders PMI to a 13-month low.

“The rupee came under pressure and breached the psychological barrier of 90 to a dollar. The RBI’s Industrial Outlook Surveys also suggest moderation in business assessment and expectations,” Kumar noted.

Economists divided over the road ahead

Macroeconomic observers are divided. A section believes that India has come a long way from the 2013 nadir, while others see challenges on multiple fronts, including jobs, industrial production, and exports.

Economist Sunil Sinha, a professor at the Chandigarh-based Institute for Development and Communication, says it depends on what lens one uses. When seen from a very short-term perspective, the current macroeconomic conditions definitely look positive, with high growth and low inflation, he says. “The picture, however, changes the moment one takes into consideration longer-term data. The 8% plus GDP growth and inflation below 1% are very recent phenomena. The question is, how sustainable are they?” Sinha says. “Even with high GDP growth, IIP growth is nose-diving, especially because of the impact of the tariff disruptions, specifically from the U.S.”

Indranil Pan, chief economist at YES Bank, says that broadly growth appears to be strong, but certain pockets of consumption, being dependent on social sector spending by the government, are a subject of critical worry. “Unless the large growth numbers get supported through income generation in the economy, it is very difficult for the growth to last,” says Pan.

However, economist N.R. Bhanumurthy, director of the Madras School of Economics, believes that the Indian economy is braving external challenges on the back of its domestic strengths. Using the 2013 taper tantrum to make his points, Bhanumurthy says India had an opposite growth-inflation equation at the time.

“At the peak of the taper tantrum, the current account deficit widened to 6.7% of GDP in Q3FY13. Right now, even with the rupee depreciation and the tariff uncertainties with the U.S., the current account deficit is around 1.3%,” Bhanumurthy tells Fortune India. “Right now, the domestic stability has absorbed the external instability. In 2013, the domestic instability exacerbated the external instability. We need to make that distinction,” Bhanumurthy points out.

Meanwhile, Sinha points out that services exports are holding ground, while concerns remain around merchandise exports. It may be noted that a report by the Union Bank of India points out that the current account deficit may rise to 1.7% of the GDP in the current financial year as global trade tariff pressures continue to keep the trade deficit elevated.

A flurry of expectations

Sinha says the Budget needs to take into account the macro numbers and realities in a holistic manner. “Formulation of future policies based on narrow data would be counterproductive as the economic realities may alter,” says Sinha.

“Take, for example, the export numbers, wherein it is being said that merchandise exports during November 2025 ($38.13 billion) have grown 19.38% over November 2024 ($31.94 billion). But we need to look at the April-November data for merchandise exports to arrive at a fair assessment of the situation,” says Sinha.

During April-November this fiscal, merchandise exports have grown a mere 2.63% to $292.07 billion from $284.6 billion in the same period of the previous financial year.

Pan suggests that the government should consider lowering the allocation to roads and railways, as the economy may be reaching a stage where its absorptive capacity is being limited. “There should be a clear focus on education, healthcare, and improving productivity of the agriculture sector. R&D will need a much bigger budget in India, compared with the allocations now,” says Pan.

Partners at Deloitte, meanwhile, call for continued thrust on infrastructure and defence. “For the Viksit Bharat 2047 vision, infrastructure has to come ahead of the demand. The infrastructure needed for India to be called a developed nation has to be created probably 10 years ahead of the target,” says Anurag Gupta, partner, Deloitte.

Given that indigenisation and modernisation are top priorities, defence production needs to be localised with 100% Make in India, says Madhumita Mohapatra, partner at Deloitte. “This has become critical in an unpredictable global environment marked by sanctions, unreliable foreign suppliers, and changing conflict dynamics.”

A new-deal Budget on the cards, says expert

Bhanumurthy, meanwhile, is of the view that the Budget will try to lay the foundations of a developed economy and the government has dropped enough hints in that direction, with Parliament passing the ‘Health Security se National Security Cess Bill, 2025’, the SHANTI (Sustainable Harnessing & Advancement of Nuclear Energy for Transforming India) Bill, 2025, and the VB-G RAM G [Viksit Bharat — Guarantee for Rozgar and Ajeevika Mission (Gramin), Bill, 2025].

“The way things are happening, I assume a number of measures could be taken up in the Budget. We have the 16th Finance Commission recommendations, and there will be inputs from the Rajiv Gauba committee on reforms,” says Bhanumurthy. “It will be a New Deal Budget,” he feels.

While high growth and low inflation numbers are definitely good for a complex economy like India, it may be too early to assume that an all-encompassing Goldilocks is playing out. The government should utilise the Budget to identify future growth areas for the developed economy goals.

Given the experience policymaking has gone through in FY26 — the Indo-Pak border conflict, U.S. tariffs, and sanctions on Russian oil — it may be safe to assume that defence, energy security, and health and education will remain the key focus areas for the government in the Budget.