In the 1986 budget, V P Singh introduced Modified Value-Added Tax (Modvat) to correct a well-known distortion in excise taxation arising from cascading input duties. The measure was presented in technical terms rather than as a headline reform. Its significance lay in eliminating taxes on taxes, thereby strengthening a system-wide public good: efficiency and neutrality of production tax regime.
That is a useful way to read Budget 2026. There are no dramatic announcements on R&D, health spending remains modest, and climate-related allocations appear incremental. All this is true. But budgets matter less for what they proclaim than for the following public goods they build, which often happen slowly, sometimes invisibly:
Macro credibility Fiscal deficit is projected to decline from 4.4% to 4.3% of GDP, with public debt projected to fall to 55.6%. Credibility lowers risk premia, stabilises expectations and preserves room for manoeuvre in an uncertain global environment.
Coordination Capex rises to ₹12.2 lakh cr, continuing the emphasis on logistics, transport corridors and risk-sharing instruments. Empirical evidence suggests that multiplier effect of capex (2.45) is significantly higher than that of revenue expenditure (0.99). Apart from this, initiatives such as ISM 2.0 and efforts to strengthen domestic ₹10,000 cr national biopharma mission also fit this logic.
Enforcing quality of rules Incremental reforms (simplified tax structures, decriminalisation of minor offences and customs facilitation) reduce transaction costs and improve predictability. These are unglamorous changes, but they matter disproportionately for firms operating close to the technological frontier.
Climate preparedness This has long occupied an ambiguous place in India's economic policy. While it is acknowledged as a necessity, it has been treated as merely supporting growth. Budget 2026 signals a meaningful shift. Sustainability has been embedded within policy itself.
This shift is most visible in capital allocation and customs policy. A ₹20,000 cr, 5-yr commitment to carbon capture, utilisation and storage (CCUS) recognises that India's hard-to-abate industries cannot decarbonise through renewables alone. Treating CCUS as public infrastructure rather than experimental technology allows for better climate-preparedness.
Yet, the budget's omissions remain significant. There is still no clear pathway for carbon pricing or a domestic carbon credit trading system, despite earlier announcements. Equally concerning is the absence of a green finance architecture capable of mobilising funding required for net-zero pathways. Stronger measures linking climate action to public health, particularly through faster EV adoption and air-quality interventions, are also missing.
Capability formation This will determine whether the state or society will be able to translate resources into outcomes under uncertainty or not. Unlike physical infrastructure or transfers, capabilities are non-rival, cumulative and economy-wide in their effects. Skilled workers, functioning institutions, interoperable systems and adaptive governance raise productivity across sectors simultaneously.
Nirmala Sitharaman's emphasis on 'Kartavya No. 2' - building people's capacity as partners in growth - signals a recognition that resilience, competitiveness and inclusion ultimately depend on human capital, institutional throughput and execution quality.
The January 2026 'Lancet Commission on a citizen-centred health system for India' report makes this diagnosis even sharper. The commission identified fragmented delivery, rigid financing and weak learning capacity the biggest constraints of India's healthcare system.
Its prescription is explicitly capability-first. Integrated primary care, strategic purchasing and the use of India Stack-style digital public infrastructure (interoperable health records, unique patient identifiers, telemedicine and real-time data) to enable coordination, accountability and adaptation at scale.
In this sense, the budget's stated shift from transfers to capacity is analytically correct. Where the gap remains is execution. Outcomes are still weakly specified and weakly enforced. That gap is also the lowest-hanging fruit.
The Lancet analysis shows that a great deal of capability formation can occur outside budgetary line items. Digital platforms, common standards, information flows and incentive-compatible governance can dramatically raise system performance without large increases in fiscal outlays.
The question, therefore, is as much whether allocations rise at the margin, as it is whether programmes are redesigned to reward outcomes, enable feedback and support decentralised problem-solving.
At the state level, however, capability formation encounters a harder constraint - capital. In fiscally weaker states such as Bihar and Jharkhand, administrative ambition is often bounded by limited fiscal headroom and inflexible transfers.
While the budget maintains Finance Commission devolution and scheme-based flows, it does not materially relax conditionalities or tilt resources toward states with the largest capability deficits. This matters because experimentation is essential to capability formation, particularly in health, where uncertainty is high and optimal spending mixes are non-contractable ex ante.
Line-item budgeting, by fixing inputs in advance, constrains adaptation and learning. Relaxing these constraints, through flexible block grants, outcome-linked financing and permissionless experimentation with strong audit trails can solve for this.
The substantive achievement of the budget lies not in its announcements, but in the public goods it incrementally strengthens.
It repositions fiscal policy around execution rather than expenditure. Its legacy will be determined by whether these enabling conditions translate into durable improvements in state capacity and outcomes. Kudos to the FM for putting a thrust on capabilities.
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Macro credibility Fiscal deficit is projected to decline from 4.4% to 4.3% of GDP, with public debt projected to fall to 55.6%. Credibility lowers risk premia, stabilises expectations and preserves room for manoeuvre in an uncertain global environment.
Coordination Capex rises to ₹12.2 lakh cr, continuing the emphasis on logistics, transport corridors and risk-sharing instruments. Empirical evidence suggests that multiplier effect of capex (2.45) is significantly higher than that of revenue expenditure (0.99). Apart from this, initiatives such as ISM 2.0 and efforts to strengthen domestic ₹10,000 cr national biopharma mission also fit this logic.
Enforcing quality of rules Incremental reforms (simplified tax structures, decriminalisation of minor offences and customs facilitation) reduce transaction costs and improve predictability. These are unglamorous changes, but they matter disproportionately for firms operating close to the technological frontier.
Climate preparedness This has long occupied an ambiguous place in India's economic policy. While it is acknowledged as a necessity, it has been treated as merely supporting growth. Budget 2026 signals a meaningful shift. Sustainability has been embedded within policy itself.
This shift is most visible in capital allocation and customs policy. A ₹20,000 cr, 5-yr commitment to carbon capture, utilisation and storage (CCUS) recognises that India's hard-to-abate industries cannot decarbonise through renewables alone. Treating CCUS as public infrastructure rather than experimental technology allows for better climate-preparedness.
Yet, the budget's omissions remain significant. There is still no clear pathway for carbon pricing or a domestic carbon credit trading system, despite earlier announcements. Equally concerning is the absence of a green finance architecture capable of mobilising funding required for net-zero pathways. Stronger measures linking climate action to public health, particularly through faster EV adoption and air-quality interventions, are also missing.
Capability formation This will determine whether the state or society will be able to translate resources into outcomes under uncertainty or not. Unlike physical infrastructure or transfers, capabilities are non-rival, cumulative and economy-wide in their effects. Skilled workers, functioning institutions, interoperable systems and adaptive governance raise productivity across sectors simultaneously.
Nirmala Sitharaman's emphasis on 'Kartavya No. 2' - building people's capacity as partners in growth - signals a recognition that resilience, competitiveness and inclusion ultimately depend on human capital, institutional throughput and execution quality.
The January 2026 'Lancet Commission on a citizen-centred health system for India' report makes this diagnosis even sharper. The commission identified fragmented delivery, rigid financing and weak learning capacity the biggest constraints of India's healthcare system.
Its prescription is explicitly capability-first. Integrated primary care, strategic purchasing and the use of India Stack-style digital public infrastructure (interoperable health records, unique patient identifiers, telemedicine and real-time data) to enable coordination, accountability and adaptation at scale.
In this sense, the budget's stated shift from transfers to capacity is analytically correct. Where the gap remains is execution. Outcomes are still weakly specified and weakly enforced. That gap is also the lowest-hanging fruit.
The Lancet analysis shows that a great deal of capability formation can occur outside budgetary line items. Digital platforms, common standards, information flows and incentive-compatible governance can dramatically raise system performance without large increases in fiscal outlays.
The question, therefore, is as much whether allocations rise at the margin, as it is whether programmes are redesigned to reward outcomes, enable feedback and support decentralised problem-solving.
At the state level, however, capability formation encounters a harder constraint - capital. In fiscally weaker states such as Bihar and Jharkhand, administrative ambition is often bounded by limited fiscal headroom and inflexible transfers.
While the budget maintains Finance Commission devolution and scheme-based flows, it does not materially relax conditionalities or tilt resources toward states with the largest capability deficits. This matters because experimentation is essential to capability formation, particularly in health, where uncertainty is high and optimal spending mixes are non-contractable ex ante.
Line-item budgeting, by fixing inputs in advance, constrains adaptation and learning. Relaxing these constraints, through flexible block grants, outcome-linked financing and permissionless experimentation with strong audit trails can solve for this.
The substantive achievement of the budget lies not in its announcements, but in the public goods it incrementally strengthens.
It repositions fiscal policy around execution rather than expenditure. Its legacy will be determined by whether these enabling conditions translate into durable improvements in state capacity and outcomes. Kudos to the FM for putting a thrust on capabilities.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Tarun Khanna
Aditya Sinha
Assistant consultant, Economic Advisory Council to PM