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As India heads into Budget 2026 against a backdrop of global growth uncertainty, the balance between sustaining momentum and maintaining fiscal prudence has come into sharp focus. While India may be in what many describe as a “Goldilocks moment,” policymakers face the challenge of preserving macro stability even as external headwinds persist.
Speaking to ET Now, Dinesh Kumar Khara underscored the importance of staying the course on fiscal discipline, arguing that it has been a key contributor to India’s relatively strong macro position.
“Fiscal discipline is absolutely essential, and the current government has ensured that over the years. Going forward, I expect that they will probably follow the same track,” Khara said. He added that India’s low-inflation environment—often cited as a hallmark of the current Goldilocks phase—has been enabled in large part by prudent fiscal management.
Khara also pointed to the government’s stated intent to address the debt-to-GDP ratio, which currently stands at around 57–58%. “If there could be a very clear path, that will probably help in terms of addressing the G-Sec yield in the long term and may lead to a lower interest rate scenario in the days to come,” he noted, adding that such clarity would reinforce the fiscal discipline seen over the past few years.
At the same time, Khara emphasised that employment generation must remain a parallel priority. He highlighted affordable housing as a sector that can deliver a dual benefit—supporting job creation while staying within fiscal constraints. “Considering the challenges from global headwinds, housing is another area where some kind of a nudge can be given. This can go a long way in addressing global challenges while ensuring that fiscal remains in check and growth continues at a decent pace,” he said.
Turning to banking, credit growth and capital expenditure, Khara outlined the structural requirements needed to support India’s long-term growth ambitions. He said that achieving an 8% growth trajectory—necessary for India’s developed-nation goal by 2047—would require a sharp rise in domestic savings.
“Going by the incremental capital output ratio, the savings rate needs to go up significantly from the current level of about 30%. Otherwise, we will have a dependence on foreign flows to support our investment needs,” he said.
While bank credit to GDP still has room to improve, Khara flagged constraints on the funding side. With the credit-deposit ratio already close to 80%, deposit growth has emerged as a critical challenge. He pointed to taxation disparities between interest income on deposits and capital market returns as a key reason behind the recent shift of household savings towards equities.
“There is a definite flight of deposits from the banking system to the capital markets over the last couple of years. For growth, we need both debt and equity, and there is a need to balance the anomaly in taxation,” Khara said, adding that aligning tax treatment across instruments could significantly improve deposit accretion and support lending capacity.
On MSME and corporate credit, Khara acknowledged the progress made through digital platforms, improved underwriting systems and smoother receivables financing mechanisms. He also noted early signs of a revival in corporate credit demand, driven partly by companies shifting from external commercial borrowings to domestic loans amid currency volatility.
“These are market dynamics that will continue to play out,” he said. “But from a budget point of view, if there is alignment in taxation between deposits and capital gains in equity and debt markets, it will go a long way in maintaining the deposit franchise of the banking system.”
As expectations build around the upcoming budget, Khara’s remarks suggest that continuity in fiscal discipline, targeted sectoral support, and structural reforms in savings and taxation could together form the backbone of India’s growth strategy in an increasingly uncertain global environment.
English (US)