Budget 2026: Capex Hike & Fiscal Consolidation on Agenda

Introduction: Setting the Stage for FY27

Finance Minister Nirmala Sitharaman is scheduled to present her ninth consecutive Union Budget, a significant event for India's economy. The budget for the fiscal year 2026-27 comes at a time when India stands as the world's fastest-growing major economy, navigating a complex global environment marked by geopolitical tensions and volatile commodity prices. The government's agenda is expected to prioritize fiscal prudence while simultaneously boosting long-term growth through strategic investments. Key areas of focus are anticipated to be defence, infrastructure, power, and affordable housing, continuing the administration's emphasis on building productive assets.

This year's budget presentation will also mark a departure from a 75-year tradition. While Part A of the budget speech historically contained the main substance, Part B is expected to be used to unveil a detailed, long-term vision for India's economic future. The budget will be presented in a paperless format, a practice adopted over the last four years.

Fiscal Health: The Consolidation Roadmap

A primary focus for economists and investors will be the government's fiscal consolidation path. For the fiscal year 2025-26, the budgeted fiscal deficit is estimated at 4.4% of Gross Domestic Product (GDP). Having successfully remained below the 4.5% target, the market now anticipates a clear direction for FY27 and beyond. Projections suggest the government may announce a fiscal deficit target between 4.0% and 4.2% of GDP for the upcoming fiscal year. This move would signal a continued commitment to strengthening public finances.

Closely linked to the deficit is the government's debt-to-GDP ratio. In 2024, the general government debt stood at approximately 85% of GDP. The medium-term goal is to reduce this figure to 60%. The budget speech is expected to provide a roadmap for achieving this debt reduction, which is crucial for macroeconomic stability and investor confidence. The gross borrowing program for FY26 was pegged at ₹14.80 lakh crore, and the corresponding figure for FY27 will be scrutinized as an indicator of the government's fiscal health.

The Capital Expenditure Thrust

Capital expenditure (capex) has been a cornerstone of the government's strategy to spur economic growth, and this trend is expected to continue. The planned capex for FY26 was budgeted at ₹11.2 lakh crore. For FY27, a significant increase of 10-15% is anticipated, which could push the total allocation beyond ₹12 lakh crore. This sustained push is vital, especially as private sector investment remains cautious. The increased spending will likely be directed towards critical infrastructure projects, including roads, railways, and urban development, which have a high multiplier effect on the economy.

Revenue and Growth Projections

The government's revenue projections will be another key area of interest. For FY26, gross tax revenue was estimated at ₹42.70 lakh crore, an 11% increase over the previous year. This included ₹25.20 lakh crore from direct taxes and ₹17.5 lakh crore from indirect taxes. GST collections alone were projected to rise by 11% to ₹11.78 lakh crore. The FY27 targets will provide insight into the government's expectations regarding economic activity and tax compliance.

These projections are based on nominal GDP growth assumptions. While the initial estimate for FY26 was 10.1%, it was later revised down to around 8% due to lower-than-expected inflation. For FY27, various estimates suggest the government may project a nominal GDP growth rate between 10.5% and 11%, reflecting its outlook on both real growth and inflation.

Key Budgetary Figures at a Glance

Focus on Rural and Social Sectors

Beyond the headline numbers, the budget is expected to maintain a strong focus on rural development and agriculture. The Rural Development Ministry has reportedly requested a 72% increase in the budget for its new employment guarantee scheme, 'Viksit Bharat - G Ram G', seeking an allocation of ₹1.51 lakh crore compared to the ₹86,000 crore for MGNREGS last year. This highlights the government's intent to boost rural employment and incomes. Allocations for other key sectors like health and education will also be closely watched as they are critical for human capital development.

Sectoral Expectations and Market Impact

Specific sectors are anticipating policy announcements that could shape their growth trajectories. The real estate industry is hopeful for revisions in the affordable housing definition and potential tax benefits on home loans. The automobile sector expects a continued push for electric vehicle infrastructure. For defence, a 12-15% increase in allocation is expected to support modernization and the 'Make in India' initiative. The telecom sector is looking for relief on regulatory levies. These sectoral allocations and policy signals will influence market sentiment and investment decisions in the coming year.

Conclusion: A Balancing Act

The Union Budget 2026 is poised to be a carefully crafted document that balances the need for fiscal discipline with the imperative of sustaining high economic growth. The emphasis is likely to remain on continuity, with a clear focus on infrastructure development, manufacturing, and long-term structural reforms. While no major populist announcements are expected, the budget will aim to create a stable and predictable policy environment to attract private and foreign investment. The key message for the markets will be one of stability, strategic investment, and a clear vision for India's path to becoming a developed economy.