What the Union Budget 2026-27 means for: Politics

BUdgets ar as often most political relation as they ar about sound finances and hard-headed economic calls. Where does the 2026-27 Budget stand on this front?The biggest news is not from the Budget per se, but the new fiscal federalism framework under which it has been prepared, namely, the 16th Finance Commission (FC) awards. It has not changed the overall share of states in central taxes, which continues to be 41%. However, what has changed, and it is a big change, is the formula which is used to distribute these taxes among individual states. The 16th FC awards, are perhaps the first decisive step to allay what many have described as the growing North-South (it is actually more poor state versus rich state) divide in India’s fiscal federalism framework. The new awards, for the first time, bring in state-wise contribution to national GDP as part of the tax devolution formula. This means that growth becomes an incentive rather than a disincentive for states to get central taxes for the first time. FC reports are large documents and fiscal federalism is a complicated subject –– this means nuanced takes will have to wait –– but the key takeaway of changes by the 16th FC can be seen from change in state-wise share from the 15th FC awards. States such as Karnataka, Kerala, Tamil Nadu (to a smaller extent) will gain in share in central taxes while states such as Bihar, Madhya Pradesh and Uttar Pradesh will lose their share. This rejigging could go a long way in assuaging the anxieties of southern states and could very well build a bridge to the next big challenge in India’s larger federal framework, namely the delimitation exercise which will redraw and reassign parliamentary constituency boundaries and numbers after the 2027 Census is completed. Perhaps it has helped the Bharatiya Janata Party (BJP) that it rules almost all states which have seen a reduction in their tax shares and maybe it is in sync with its objective of expanding its footprint in southern states, but what matters is that the political system has aligned with what is prudent here.The larger politics of this year’s budget, of course, goes beyond the more academic and technocratic question of fiscal federalism. It continues with the trend of the government’s brand of cultural nationalism in keeping with the larger ideology of the BJP, which seeks to align India’s cultural heritage with its economic progress. Temple towns find mention in the discussion about making Tier II and Tier III cities an engine of growth, which could very well translate into a policy which aligns the economic with the emotive. Similarly, there is an entire section on development of a Buddhist circuit in Northeastern states and developing curated tours on archaeological sites across the country. Things such as yoga and ayurveda have been linked with the prospects of India’s growth in services and agriculture thereby buttressing the impression that culture will continue to be an integral driver of the economy.Politics’s imprint in the Budget is not restricted to the BJP portraying India’s soft power alone. It can also be seen in the government putting the money behind its muscular position on national security. The allocation to the Intelligence Bureau (IB) –– it is the key domestic central intelligence gathering apparatus in the country –– has been increased from just above ₹4,000 crore to more than ₹6,700 crore between 2024-25 and 2026-27. Similarly, the defence budget has increased by more than ₹1,00,000 crore on a Budget Estimate (BE) basis between 2025-26 and 2026-27. The fact that even the 2025-26 Revised Estimate (RE) numbers were higher than the BE numbers by more than ₹70,000crores shows that Operation Sindoor did lead to a larger than budget military spending.There might not have been any big-bang welfare announcements in this year’s budget. But, at least on one issue the government has tried to pre-empt criticism from the opposition and civil society at large. While it did bring a bill to rechristen and redesign the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) to the Viksit Bharat—Guarantee for Rozgar and Ajeevika Mission (Gramin) or VB––G RAM G bill which increases the resource sharing burden on states from 10% under the old scheme to 40%, it has increased its own allocation for the VB––G RAM G programme to ₹95,692 crore compared to last year’s allocation of ₹86,000 crore for the MGNREGS. The intent is clear: the government wants to portray the change as geared towards a larger goal rather than driven by purely fiscal considerations. To be sure, if the states cannot or do not find the concomitant allocations for the new programme, a lot of the money for the programme could remain unutilised, making the increase notional in nature.One could go on picking up different strands of the budget and linking with larger political considerations. But the more useful way to read and understand the budget’s politics is to zoom out rather than zoom in. The BJP under Narendra Modi is a political economy beast which believes in maximizing the political bang from the fiscal buck by optimising things such as attribution (to the prime minister), association (through things such as developing temple towns) and retribution when needed (through its willingness to take calculated military risks to be seen as being strong on national security). Of course, its larger political fortunes have been buttressed by fiscal largesse at the level of states if not the Centre.