Union Budget 2026: Capex Push and Fiscal Discipline

Introduction to Budget 2026

Finance Minister Nirmala Sitharaman presented the Union Budget for the financial year 2026-27 in the Lok Sabha on February 1, 2026. This marked her ninth consecutive budget presentation, a significant milestone. The budget was delivered at a time when the Indian economy is navigating a complex global environment, characterized by geopolitical tensions and volatile trade dynamics. The core agenda of the budget appears to be sustaining India's growth momentum through strategic public investment while adhering to a path of fiscal prudence. The government aims to bolster infrastructure and manufacturing, improve the ease of doing business, and create jobs, all while managing its finances carefully.

Economic Context and Projections

The budget is set against a backdrop of robust domestic economic performance. The Economic Survey, tabled in Parliament on January 29, projected that India's economy would grow by 7.4% in the current fiscal year (FY26) ending March 31. For the upcoming fiscal year 2026-27 (FY27), the growth is forecast to be between 6.8% and 7.2%. This resilience is attributed to strong domestic demand, regulatory reforms, and a stable macroeconomic foundation. However, the outlook is not without challenges. Global headwinds, including punitive US tariffs imposed last year and uncertainty in international trade, have put pressure on export-oriented industries. The Indian rupee has also faced weakness, sliding almost 5% last year, and foreign investor sentiment has been cautious, with significant outflows recorded in 2025.

Fiscal Roadmap and Key Numbers

A central theme of Budget 2026 is fiscal consolidation. The government is expected to continue its efforts to bring down the fiscal deficit and manage its debt levels. The target for the fiscal deficit for the current year (2025-26) was 4.4% of GDP. For the upcoming fiscal year 2026-27, economists anticipate a slightly lower target of around 4.2% of GDP. This disciplined approach is crucial for maintaining macroeconomic stability and reassuring global investors. The government's long-term goal is to reduce the central government's debt-to-GDP ratio from the current 56% to a range of 49%-51% by 2031. To finance its expenditure, gross market borrowing is projected to increase from ₹14.6 lakh crore this year to between ₹16 lakh crore and ₹16.8 lakh crore in FY27.

Emphasis on Capital Expenditure

Continuing the strategy from previous years, capital expenditure (capex) remains a primary engine for growth. The government is expected to increase its capex outlay to approximately ₹12 lakh crore for FY27, up from ₹11.2 lakh crore in the current year. This sustained push in public spending is aimed at creating long-term assets, improving infrastructure, and crowding in private investment, which has remained relatively muted. Key sectors likely to receive priority in this capex drive include railways, defence, renewable energy, power transmission, and urban infrastructure. The government is also expected to increase defence spending by 20%, marking one of the largest hikes in recent years to modernize the armed forces and promote indigenisation.

Sectoral Focus and Policy Initiatives

The budget is anticipated to introduce measures to support several key sectors. For manufacturing, the government may refine the Production-Linked Incentive (PLI) schemes to enhance their effectiveness in boosting domestic production, exports, and employment. Job creation is a prominent theme, with potential incentives for labour-intensive manufacturing and a renewed focus on skilling and apprenticeship programs. The green transition is another area of focus, with expected support for renewable energy, green hydrogen, battery storage, and electric mobility to help India achieve its climate goals and reduce import dependency on energy. Furthermore, with key state elections on the horizon, the budget may include specific measures for states like West Bengal, Tamil Nadu, Kerala, and Assam.

Market Response and Special Trading Session

In a rare move, the stock exchanges, including the NSE and BSE, conducted a special trading session on Sunday, February 1, to coincide with the budget presentation. This ensured that market participants could react to the policy announcements in real-time. The initial market reaction was muted, with benchmark indices opening marginally lower as investors digested the details of the fiscal plan. The budget's impact on the rupee will be closely watched, as fiscal deficit numbers and policies affecting foreign investment flows are key determinants of the currency's direction.

A Budget of Continuity and Vision

Finance Minister Nirmala Sitharaman's ninth budget signals a commitment to policy continuity, focusing on long-term structural growth rather than short-term populist measures. The presentation itself saw a break from tradition, with reports suggesting that Part B of the speech, typically reserved for tax proposals, would be expanded to outline a detailed long-term economic vision for India. This approach underscores the government's intent to lay a clear roadmap for the country's development, balancing immediate needs with future ambitions. The budget aims to fortify the economy against external shocks while building a foundation for sustained and inclusive growth in the years to come.