Union Budget 2026: Balancing Growth, Capex, and Fiscal Prudence

Introduction to Union Budget 2026

Finance Minister Nirmala Sitharaman is set to present her ninth consecutive Union Budget on February 1, 2026, for the fiscal year 2026-27. This budget arrives at a crucial moment for the Indian economy, which is demonstrating resilience with a projected GDP growth between 6.8% and 7.2% for FY27. However, this domestic strength is set against a challenging global landscape marked by trade frictions and geopolitical instability. The central theme of this budget is expected to be a carefully calibrated strategy that balances the need for sustained economic growth with a commitment to fiscal prudence, focusing on supply-side enhancements rather than broad consumption stimuli.

A New Fiscal Anchor: Debt-to-GDP Ratio

A significant policy shift anticipated in this budget is the move from a rigid annual fiscal deficit target to a more flexible framework anchored by the debt-to-GDP ratio. The government's medium-term goal is to reduce the central government's debt to approximately 50% of GDP by FY31. For the upcoming fiscal year FY27, the fiscal deficit is projected to be modestly reduced to around 4.2% of GDP, down from an estimated 4.4% in FY26. This gradual consolidation path signals a commitment to long-term macroeconomic stability while providing enough flexibility to support growth initiatives.

Continued Emphasis on Capital Expenditure

Capital expenditure (capex) is expected to remain the primary engine of the government's growth strategy. Building on the significant infrastructure push of recent years, the budget is likely to allocate over ₹12 lakh crore for capex in FY27, representing a year-on-year increase of about 10%. This investment will be channeled into critical sectors such as roads, railways, defence manufacturing, and urban infrastructure. The continued focus on initiatives like PM Gati Shakti aims to reduce logistics costs, enhance connectivity, and crowd in private investment, thereby building a foundation for long-term productive capacity.

Sectoral Priorities and Manufacturing Boost

The budget is expected to outline targeted support for several key sectors to enhance India's manufacturing capabilities and export competitiveness. The Production-Linked Incentive (PLI) schemes will likely see refinements to further boost domestic production, particularly in electronics, where the goal is to achieve 90% value addition by FY27. Job creation is another prominent theme, with incentives anticipated for labour-intensive manufacturing, skilling programs, and apprenticeships. Micro, Small, and Medium Enterprises (MSMEs), which have faced pressures from high input costs, may receive enhanced credit-guarantee support to improve their financial health and operational resilience.

Green Transition and Digital Infrastructure

Aligning with India's long-term development goals, the FY27 budget is expected to strengthen support for the green energy transition. This includes incentives for renewable energy, green hydrogen, battery storage, and electric mobility. The objective is to enhance domestic manufacturing of clean-energy equipment and reduce reliance on imports. Simultaneously, the budget will likely accelerate the development of digital infrastructure. Technology firms anticipate policy support for the Artificial Intelligence (AI) ecosystem, data centers, and cloud services, which are critical for India's ambition to become a leading digital economy.

Tax Policy: A Focus on Stability

On the taxation front, the government is expected to prioritize stability and predictability over major reforms. Significant changes to personal or corporate income tax rates are unlikely. Instead, the focus will be on simplifying regulations, improving compliance through digitization, and widening the tax base. This approach aims to provide a stable tax environment for businesses and investors, fostering confidence and encouraging long-term investment. Some minor tweaks to personal income tax could be considered to provide incremental relief to the middle class and support consumption.

Key Budget Projections for FY27

Market Outlook and Investor Sentiment

Financial markets are approaching the budget with cautious optimism. The bond market is closely monitoring the government's borrowing program. While gross borrowing is set to rise due to a heavy redemption calendar, net borrowing is expected to remain stable. Bond investors are looking for clarity on the debt glide path and fiscal credibility, which are more critical than the headline deficit number. The equity markets have adopted a wait-and-watch stance, seeking clear signals on policy continuity and structural reforms that can sustain long-term growth. A budget that reinforces fiscal discipline while supporting investment is likely to be received positively.

Navigating Economic Challenges

The budget must address several challenges, including lower-than-expected nominal GDP growth, which could impact tax revenue collections. Global trade tensions, particularly US tariffs on certain Indian goods, continue to pose a risk to export-oriented sectors. The government's ability to find new growth drivers, manage subsidy expenditures efficiently, and push forward with structural reforms will be critical. The budget will be scrutinized for its effectiveness in translating economic growth into durable employment gains and enhancing India's manufacturing competitiveness on the global stage.

Conclusion

The Union Budget for FY27 is poised to be a strategic document that reinforces India's long-term growth agenda. By prioritizing capital expenditure, manufacturing, and fiscal sustainability, the government aims to build a resilient and competitive economy. The focus is clearly on creating productive assets and enhancing the supply side of the economy, which is a prudent approach in the current global environment. The measures unveiled on February 1 will set the economic course for the coming year and provide crucial signals for the path towards a 'Viksit Bharat'.