Budget 2026: India Boosts Capex by 9% to ₹12.2 Trillion Amid Global Risks

Introduction: A Budget for Resilience

Finance Minister Nirmala Sitharaman presented the Union Budget for the fiscal year 2026-27 on Sunday, outlining a strategy focused on bolstering domestic manufacturing and infrastructure while maintaining fiscal prudence. Against a backdrop of global geopolitical tensions, steep US tariffs, and trade uncertainties, the budget aims to enhance India's economic resilience. The government announced a 9 per cent increase in capital expenditure, signaling a continued commitment to public investment as a primary driver of growth.

Key Fiscal Announcements

The budget's headline figures reflect a dual approach of stimulating growth and adhering to a path of fiscal consolidation. Capital expenditure is set to rise to ₹12.2 trillion for the fiscal year beginning April 1. This sustained investment aims to upgrade the nation's infrastructure and create a more competitive manufacturing ecosystem. On the fiscal discipline front, the government targets a fiscal deficit of 4.3 per cent of Gross Domestic Product (GDP) for the upcoming year, a marginal improvement from the current year's estimate of 4.4 per cent. Similarly, government debt is projected to decrease to 55.6 per cent of GDP from 56.1 per cent.

Despite the lower deficit target, the government plans a record gross market borrowing of ₹17.2 trillion to finance its expenditure, highlighting the scale of its investment ambitions.

Strategic Focus on Manufacturing and Infrastructure

The increased capital outlay is directed towards several key sectors. Railways, roads, airports, and ports are major beneficiaries, aligning with the government's long-term vision for a robust logistics network. The budget also reinforces support for small and medium-sized enterprises (MSMEs), which are crucial for job creation and are often most vulnerable to economic shocks. Specific initiatives were highlighted for critical minerals, pharmaceuticals, and electronics manufacturing. The allocation for the electronics component sector's incentive program will be increased to ₹400 billion, and a new ₹100 billion fund will be established for biopharmaceutical research over the next five years.

Raghav Madan, a director at Deloitte India, noted that the consistent focus on infrastructure over the last decade reinforces continuity rather than signaling a one-off push, underlining the government's long-term strategy.

Navigating a Turbulent Global Environment

The budget is framed amid significant external challenges. The United States, India's largest export market, has imposed steep tariffs of up to 50 per cent on certain goods, impacting labor-intensive sectors like textiles, garments, and auto components. Negotiations for a bilateral trade deal remain stalled, with unresolved issues concerning market access for US agriculture and dairy products. This has prompted Indian exporters to seek new markets and recalibrate supply chains.

Furthermore, competition from China remains a key concern. Rising imports from China across electronics, machinery, and chemicals have led to calls for measures to protect domestic industries and promote self-reliance through frameworks like 'Atmanirbhar Bharat'.

Trade Policy and Diversification

In response to these global pressures, India has actively pursued a strategy of trade diversification. Recent agreements with the UK, New Zealand, and Oman are part of a broader effort to reduce dependency on any single market. The government is also engaged in negotiations for a comprehensive Free Trade Agreement (FTA) with the European Union. However, experts caution that India must remain firm on its 'red lines,' particularly in protecting its agriculture and dairy sectors from unrestricted foreign competition. The focus is on creating balanced agreements that support domestic producers while expanding access to new markets.

Market Reaction and Investor Sentiment

The stock market's initial reaction to the budget was mixed. The benchmark index, which had been trading higher, fell by 1.5 per cent following the announcement of a tax increase on some equity transactions. The tax was raised from 0.02 per cent to 0.05 per cent, a move that dampened investor sentiment in the short term. This highlights the delicate balance the government must strike between raising revenue and maintaining a favorable investment climate.

The Challenge of FTA Implementation

While signing new trade agreements is a key part of the strategy, experts point out that their real-world effectiveness depends on domestic trade infrastructure. The customs administration, in particular, plays a critical role. Complex Rules of Origin (RoO) and the stringent application of Quality Control Orders (QCOs) have created compliance hurdles for businesses, especially MSMEs. This uncertainty can deter companies from utilizing the benefits of FTAs, leading them to pay normal tariffs instead. The budget's success will partly depend on simplifying these ground-level procedures to ensure that negotiated market access translates into actual trade growth.

Conclusion: A Path of Cautious Optimism

Union Budget 2026 charts a course of continued public investment to strengthen India's domestic economic foundations. By boosting capital expenditure in critical sectors, the government aims to enhance productivity and competitiveness. This inward focus is a pragmatic response to a volatile global landscape marked by trade disputes and geopolitical uncertainty. The success of this strategy will hinge on efficient execution, continued fiscal discipline, and the effective implementation of trade agreements to truly insulate the Indian economy and sustain its growth trajectory.