Budget 2026: Balancing India's Capex Push with Job Creation

Introduction: A Budget of Continuity and Challenge

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget on February 1, 2026, the Indian economy stands at a critical juncture. Expectations are centered on a policy framework that continues the government's multi-year focus on capital expenditure (capex) to drive growth, while navigating the tightrope of fiscal consolidation. However, this year's budget is overshadowed by a persistent question: can the infrastructure-led growth model translate into meaningful job creation for India's large youth population? The budget is anticipated to provide a roadmap that balances these competing priorities, aiming for long-term resilience amid global economic uncertainties.

The Capex Cornerstone: Sustaining the Infrastructure Drive

The government is expected to maintain infrastructure spending as its primary growth engine. Analysts project a 7-14% increase in the capex outlay, potentially reaching around ₹12 trillion from the ₹11.21 trillion allocated in the previous fiscal year. This sustained investment will likely target key sectors such as roads, railways, urban infrastructure, and renewable energy. The strategy is rooted in the belief that public investment in these areas has a significant multiplier effect, crowding in private investment, reducing logistics costs, and improving overall economic productivity. This approach aligns with the long-term 'Viksit Bharat 2047' vision, which relies heavily on a modern, efficient infrastructure backbone.

Fiscal Discipline Under Scrutiny

Despite the pressure to spend, the government is expected to remain committed to its fiscal consolidation path. The fiscal deficit target for FY27 is likely to be maintained around 4.3% of GDP. This commitment is crucial for maintaining investor confidence and keeping borrowing costs in check. However, fiscal space remains constrained. Rising interest payments, which are projected to consume ₹12.76 trillion or over 25% of total expenditure, limit the government's ability to significantly increase spending in other areas. This fiscal rigidity forces difficult trade-offs, particularly between capital and revenue expenditure.

The Crowding-In Illusion: Growth Without Jobs?

A decade of prioritising capital expenditure has yielded impressive results in asset creation, with national highways, airports, and digital connectivity expanding rapidly. Yet, this strategy has not produced a corresponding boom in high-quality employment. Youth unemployment for the 15–29 age group stands at a high of approximately 14%, nearly three times the national average. The core issue is a structural misalignment: public and private investment have flowed predominantly into capital-intensive sectors like power and transport, while labor-intensive sectors such as textiles, food processing, and apparel have seen a decline in new project announcements. This indicates that while infrastructure improves connectivity, it is not a sufficient condition to attract investment in job-rich industries.

State-Level Disparities in Infrastructure and Employment

Data reveals that a higher infrastructure score does not automatically translate to lower unemployment, highlighting the complexity of the issue. Factors beyond connectivity, such as skill availability, regulatory certainty, and access to credit for MSMEs, play a more decisive role in private investment decisions.

This data shows that states like Gujarat and Madhya Pradesh have managed lower unemployment with modest infrastructure, while Kerala and Tamil Nadu face high unemployment despite better infrastructure. This suggests that complementary policies supporting labor-intensive sectors are essential.

Fiscal Trade-offs and Squeezed Social Spending

The relentless focus on capex, coupled with inflexible interest payments, has put a squeeze on social sector spending. Allocations for crucial areas like health, education, and skills development have grown only marginally. Key welfare schemes have seen stagnant budgets, with MGNREGA frozen at ₹86,000 crore and PM-KISAN at ₹63,500 crore. This underinvestment in human capital weakens the economy's ability to absorb labor. Without a skilled workforce and a robust social safety net, the benefits of infrastructure-led growth remain concentrated, failing to generate broad-based employment.

Sectoral Expectations and Market Outlook

Various sectors have specific expectations from Budget 2026, hoping for targeted support to navigate challenges and capitalize on opportunities.

For the stock market, the budget is a key event. Investors will be watching for signals on fiscal prudence and the continuity of the capex push. A growth-oriented yet fiscally responsible budget could act as a positive trigger. Stocks in the infrastructure, railways, and capital goods sectors, such as L&T, Ashoka Buildcon, and RITES, will be in focus. However, a modest increase in allocations, particularly for railways, may keep related stocks range-bound.

Conclusion: A Call for Rebalancing

Union Budget 2026 is poised to be a document of policy continuity, reinforcing the government's commitment to building a world-class infrastructure network. The challenge, however, lies in rebalancing this strategy to address the pressing need for job creation. The budget must move beyond asset creation to focus on building a labor-absorbing economy. This requires not just sustained capex, but also a renewed focus on human capital, targeted support for labor-intensive industries, and creating more fiscal space for states to invest in skills and social welfare. The success of this budget will be measured not just by the kilometers of highways built, but by the number of quality jobs created for India's aspiring youth.