Economic experts have recommended a strategic approach for fiscal consolidation in the upcoming budget, suggesting the government reduce the fiscal deficit to 4.0% of GDP in 2026-27 while maintaining growth momentum through sustained capital expenditure. The recommendations come amid concerns over revenue shortfall and the need to support private investment.

Economic Projections and Revenue Estimates

The nominal GDP magnitude for 2025-26 is estimated at ₹357.14 lakh crore. Applying a nominal growth rate of 9.5%, the figure for 2026-27 is projected at ₹391.10 lakh crore. However, revenue collection has shown concerning trends during the current fiscal year.

For the period April to November 2025-26, the Centre's gross tax revenues have shown growth of only 3.3% compared to the budgeted full-year growth of 10.8%, according to Controller General of Accounts data. While GTR growth may improve in the remaining four months, it would still fall short of budgeted expectations.

Fiscal Consolidation Strategy

The experts suggest reducing the fiscal deficit-to-GDP ratio to 4.0% in 2026-27, representing a 40 basis points decline. This would limit the fiscal deficit magnitude to ₹15.83 lakh crore, which appears achievable with appropriate adjustments.

The revenue shortfall may be partially offset by:

• Two newly introduced measures relating to central excise tax on tobacco and tobacco products
• Health Security and National Security Cess
• Higher dividends from the Reserve Bank of India
• Potential cuts in revenue expenditures

Budget Estimates for 2026-27

The experts have provided detailed estimates for various fiscal aggregates, assuming a tax buoyancy of 1 and nominal GDP growth rates for certain components.

To accommodate the proposed fiscal deficit reduction of 0.4 percentage points of GDP, the revenue expenditure-to-GDP ratio would need adjustment from 10.7% in 2025-26 to 10.3%, while increasing the capital expenditure-to-GDP ratio by 0.1 percentage points.

Investment and Consumption Outlook

The real gross fixed capital formation-to-GDP ratio has remained relatively stable at approximately 33.6% on average during 2022-23 to 2024-25, with a marginal increase to 33.8% in 2025-26 according to first advance estimates. Despite extensive GST rate reductions and sustained repo rate cuts providing policy support for consumption expenditure growth, private investment has not shown significant pickup.

The experts emphasize the need to explore reasons behind sluggish private investment and suggest that investment sentiments may improve after global supply bottlenecks ease and global growth picks up. They recommend the Centre continue supporting growth by maintaining capital expenditure momentum while facilitating more sectoral-level interventions in the upcoming budget.

Tax policy experts have presented comprehensive recommendations for Budget 2026 to enhance India's mergers and acquisitions environment, particularly with the Income-tax Act, 2025 scheduled for implementation from April 1, 2026. The suggestions aim to address existing regulatory gaps and improve the ease of doing business for M&A transactions.

Fast-Track Demerger Tax Neutrality

A primary recommendation involves extending tax neutrality to fast-track demergers under Section 233 of the Companies Act, 2013. Currently, the Income-tax Act, 2025 provides tax neutrality only to NCLT-approved demergers under Sections 230 to 232, excluding fast-track demergers that enable small or closely held companies to undertake demergers without court approval.

The finance ministry's rationale for excluding fast-track demergers centers on concerns about potential valuation manipulation without court oversight. However, experts argue this approach contradicts the ease of doing business agenda, forcing genuine taxpayers to choose between transaction efficiency and tax benefits.

Contingent Consideration Clarity

Experts emphasize the need for clear taxation guidelines on earn-out, profit-linked, or contingent consideration arrangements that have become increasingly common in M&A transactions. These arrangements tie part of the sale consideration to achieving specific profitability or financial milestones.

The current legal framework lacks clarity on:

• Taxability of contingent payments
• Timing of taxation for such arrangements
• Treatment of milestone-based considerations

Foreign Company Merger Anomalies

The recommendations address existing inconsistencies in foreign company merger taxation. While foreign companies enjoy capital gains tax exemptions on direct or indirect share transfers during mergers with other foreign companies, shareholders of the amalgamating company face potential capital gains liability on share swaps.

This creates an anomaly compared to domestic mergers, which provide exemptions at both company and shareholder levels.

Capital Gains Tax Rate Concerns

The recent capital gains tax regime rationalization introduced higher long-term capital gains tax rates, which experts suggest adversely impacts investor returns and exit efficiency. The increased rates potentially drive investors toward jurisdictions with more favorable tax regimes.

Key concerns include:

• Reduced post-tax returns for investors
• Decreased competitiveness with other investment destinations
• Impact on foreign capital attraction

Experts recommend reducing capital gains tax rates, suggesting restoration of the earlier 10.00% rate to improve India's competitive position in attracting foreign investment.

Strategic Implementation Timeline

With the Income-tax Act, 2025 set for April 1, 2026 implementation, Budget 2026 represents the final opportunity to incorporate these amendments before the new framework takes effect. The recommendations aim to position India as a preferred destination for cross-border M&A activities while maintaining regulatory integrity and supporting corporate growth objectives.