More Stories

Informist, Tuesday, Jan. 20, 2026

 

Please click here to read all liners published on this story

--NIPFP Rao: Govt should opt for one-time cash transfer to boost demand
--NIPFP Rao: Income transfer smarter way to stimulate demand than tax cuts
--CONTEXT: NIPFP Director Kavita Rao's comments in interview to Informist
--NIPFP Rao:GST cut increased demand only in few sectors such as automobiles
--NIPFP Rao: Govt should target capex in areas with low infrastructure
--NIPFP Rao: Current global situation doesn't support pvt capex rise
--NIPFP Rao: Gradual rupee depreciation better for exports than quick fall
--NIPFP Rao: Govt may target very moderate fall in debt-to-GDP in FY27
--NIPFP Rao: Govt to meet FY26 fisc deficit aim with expense rationalisation

 

By Priyasmita Dutta and Shubham Rana

 

NEW DELHI – There is a case for the government to consider a one-time income supplement in the Budget for 2026-27 (Apr-Mar) should it want to boost consumption demand in the near-term, Economist Kavita Rao said, arguing that tax cuts may not be the most effective tool to tackle demand slowdown. "An income transfer of some kind is a smarter way to stimulate demand than tax cuts," Rao, director at the National Institute of Public Finance and Policy, told Informist in an interview.

 

In the Budget for FY26, the government had raised the level of minimum income at which income tax applies and then cut the goods and services tax in September. These measures have increased disposable income in the hands of taxpayers and were expected to spur demand. However, consumption demand continues to be tepid.

 

"Governments at the central and state levels have done a lot of small and large things in the form of various income supplements which perhaps do a lot more than a GST cut. So, anything which looks like an income supplement actually places INR 2,000-3,000 in people's hands," Rao said. "I think you should not touch taxes. You should try to see what you can do with the money that you realise instead of saying okay, let's do 5% rate cut. It doesn't yield much," she said.

 

REVEX vs CAPEX

According to Rao, the impact of GST rate cuts on consumption demand has been successful in limited sectors, like automobiles, where the lower tax rate made a significant difference in retail prices. For the rest, the GST is not that sensitive, she said. "GST is the route through which you will affect the lowest income groups, but the impact is not large enough for people to respond since it depends on the impact of lower taxes being passed forward as lower prices as well."

 

Direct benefit transfers tend to have leakage and higher fiscal liability, often putting strain on government coffers, and states with huge cash transfer schemes are already facing this strain. Rao argued that the government can always announce a one-time income supplement scheme, and not commit to a long-term programme. "You can say this is only for two years, or this is for a year. That is an easier support to demand if one is looking for a quick fix," she said.

 

Before the government focussed on reviving consumption demand in the FY26 Budget, the current dispensation largely depended on capital expenditure to drive economic growth. Rao said that while infrastructure augmentation is necessary for India, the problem in infrastructure investment is two-fold.

 

First, infrastructure is a necessary condition but not a sufficient condition for sustained growth. "Just because you have a road someone will not build a factory. Along with the road, they need demand," she argued. Second, infrastructure has become increasingly capital intensive with very little trickle-down effect, leading to income concentration among the highest income groups and biggest corporations. "The multiplier effect of demand has actually got altered over time," she said.

 

To address the first issue, the government should assess areas where infrastructure constraints persist and make targeted investments, she said. "This might be crucial for realising an increase in private investment," Rao said.

 

The government has increased its capital expenditure allocation manifold, and has pegged it at INR 11.21 trillion for FY26, nearly three-fold of what it was six years ago. A few experts have pointed out that the government's capital spending has perhaps reached a saturation point with limited avenues left to cover and also the huge fiscal space that such spending takes.

 

GROWTH GAME

According to Rao, the Budget's key challenge this year will be striking a balance between continuing with augmenting capital expenditure within the limited fiscal space. The current international environment does not support a private capital investment cycle, which means public spending will have to keep "the ball rolling" to sustain economic growth.

 

Finance Minister Nirmala Sitharaman will present the Budget on Feb. 1, at a time when India faces risks from multiple exogenous factors, including steep tariffs from its top export destination, the US. There is significant pressure on the rupee as well. According to Rao, while structurally a quick depreciation in the rupee is good for exports, the shocks have a transition cost which makes a gradual decline a better option. "The RBI (Reserve Bank of India) is actively managing the volatility of the rupee and we are seeing a gradual depreciation of the rupee," she said.

 

The rupee depreciated almost 5% against the dollar in 2025, hitting multiple all-time lows, the lowest being 91.0775 per dollar in December. The domestic currency logged its worst annual fall in three years and was one of the worst performers amongst Asian currencies.

 

With both currency and trade under pressure from US' tariff, India has resorted to export diversification to continue with export momentum. To gain from rupee depreciation, Rao argued, expanding to new markets could be critical. "In the short run however, it appears that we should look more inwards than outwards. Safer bet is quicker adjustment in the domestic market. Domestic demand is where you can rely," she said.

 

Even amid a cautious external environment, the Indian economy likely grew 7.4% in FY26, according to first advanced estimates by the statistic ministry. Nominal GDP is estimated at 8% this year, lower than the 10.1% growth assumed in FY26 Budget, owing to very low inflation in the country. The economist said it can be "safely assumed" that the government will project nominal GDP growth for FY27 at 9.5-10.0%. If inflation averages 3% in FY27, 10% nominal GDP growth is "achievable", she added.

 

"If inflation edges back to about 3.5-4.0% (in FY27), it is actually good for the government," Rao said. "The only thing is when inflation reaches 4%, we may not look at 8% growth, we might be looking at 6.5%. But that still takes us to 10% nominal GDP growth."

 

Inflation has been benign in 2025, allowing the RBI to cut interest rates by 125 basis points to support growth. The central bank projects inflation will average 2.0% in FY26 and 4.5% in FY27, per its structural model estimate. The nominal GDP assumed in the Budget is crucial as it determines key Budget targets, including fiscal deficit and tax collections. The government has projected fiscal deficit for FY26 at 4.4% of GDP, marking the last leg of its fiscal consolidation path announced in the FY22 Budget.

 

NOMINAL EFFECT

The finance minister will likely lay down a new fiscal consolidation path in the FY27 Budget, in line with its shift in fiscal anchor--targeting debt-to-GDP ratio, rather than fiscal deficit as a percentage of nominal GDP. The Budget documents for FY26 said the government aims to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP. Its target for fiscal consolidation is that the Centre's debt is 50% of GDP, plus or minus 1%, by FY31 from an estimated 56.1% in FY26.

 

Rao said the government will estimate a "very moderate" reduction in debt-to-GDP ratio in FY27 because of the large-scale uncertainties in the global environment. She also expects the government to roll out a five-year fiscal consolidation path in the Budget. The 16th Finance Commission's report might include some recommendations on this front, she said.

 

Although the government has announced a shift in its fiscal anchor, aligned with metric preferred by global rating agencies, Rao said a fiscal deficit to GDP target is also necessary. She argued that a debt-to-GDP ratio-based consolidation path liberates the government from a particular fiscal deficit target and allows this to be a floating target. "Every debt target has to actually be converted into a fiscal deficit to GDP target and the nominal value of fiscal deficit target will depend on nominal GDP growth," she said.

 

"For any given year, the budget will announce a debt to GDP target and assumptions on GDP growth, which will in turn translate into a fiscal deficit number. Operationally, there might not be a big difference," she said.

 

In the current year, the government's fiscal deficit is under focus owing to lower tax collections due to the dual tax bonanzas announced during the year. "The incentive will not set us down to a lower growth path. We can still have robust growth next year," Rao said while speaking about the lacklustre income tax collections. The government's non-corporate tax collections--primarily income tax collections--were up 1.2% on year at INR 10.58 trillion up to Jan. 11, latest data showed. The Budget had projected personal income tax collections to grow 12.7% in FY26 to INR 14.38 trillion.

 

"I do not think the income growth of the middle class has slowed down. So middle class incomes are doing reasonably okay, it's the poorer income groups which are not doing so well," she said. The NIPFP director still sees the government meeting the 4.4% fiscal deficit target this year, with rationalisation of expenditure under a few big ticket items such as Mahatma Gandhi National Rural Employment Guarantee scheme. The government has allocated INR 860 billion for the scheme in FY26, 0.24% of GDP.

 

The economist also said that if nominal GDP grows around 10% in FY27, the government's tax buoyancy will likely be 1, which is not a challenge. "Where does the challenge come? The challenge comes in whether you can sustain GDP," Rao said. Tax buoyancy measures how well tax revenue is growing compared to the economic growth. A buoyancy of over 1 means tax revenue is rising faster than GDP growth.  End

 

Edited by Ashish Shirke

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.

 

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2026. All rights reserved.