Union Budget 2026: Focus on Growth, Capex, and Fiscal Prudence

Introduction to Union Budget 2026

Finance Minister Nirmala Sitharaman is set to present the Union Budget for the fiscal year 2026-27 on February 1, 2026. This marks her ninth consecutive budget presentation, a significant milestone in India's parliamentary history. The budget is being delivered at a time when the Indian economy has demonstrated strong resilience, yet faces considerable headwinds from a volatile global environment, including persistent US tariffs and geopolitical uncertainties. The speech, scheduled for 11 a.m. in the Lok Sabha, is highly anticipated by markets, industries, and the public for its policy direction on sustaining growth, managing fiscal health, and boosting key sectors.

Economic Backdrop: Growth Amidst Global Volatility

The budget is presented against a positive domestic economic backdrop. The Economic Survey, tabled in Parliament on January 29, projects India's economy to grow by 7.4% in the financial year 2026 (FY26) and between 6.8% and 7.2% in FY27. This robust outlook is supported by strong domestic demand and a stable macroeconomic environment. Inflation has cooled significantly, with retail inflation falling below 2%, prompting the Reserve Bank of India to describe the current phase as a "Goldilocks" scenario—strong growth combined with low inflation. India is on track to surpass the $1 trillion GDP mark, reinforcing its position as the world's fastest-growing major economy.

Fiscal Consolidation and Key Numbers

A central theme of this year's budget is expected to be fiscal prudence. The government remains committed to its fiscal consolidation roadmap. The target for the fiscal deficit for the upcoming year (2026-27) is anticipated to be around 4.2% of GDP, a slight reduction from the current year's target of 4.4%. To finance its expenditure, the government's gross borrowing is projected to increase to a range of ₹16 lakh crore to ₹16.8 lakh crore, up from ₹14.6 lakh crore this fiscal year. This disciplined approach is crucial for maintaining investor confidence and managing the national debt, with a long-term goal of reducing the debt-to-GDP ratio from 56% to between 49% and 51% by 2031.

Focus on Capital Expenditure and Infrastructure

Continuing its push to enhance infrastructure, the government is expected to increase its capital expenditure (capex). Allocations are likely to rise to around ₹12 lakh crore from the current year's ₹11.2 lakh crore. This sustained investment in roads, railways, and other critical infrastructure is aimed at crowding in private investment, creating jobs, and improving long-term productive capacity. The emphasis on public spending remains a core strategy, especially as private investment has been relatively muted.

Sectoral Expectations and Policy Reforms

The budget is likely to introduce targeted measures for several key sectors. To counter the impact of US tariffs and boost global competitiveness, a rationalization of the customs duty structure is expected. The Production-Linked Incentive (PLI) scheme may be expanded to further strengthen domestic manufacturing. The defence sector is also poised for a significant allocation increase, potentially by as much as 20%, to promote indigenous manufacturing and modernization. Furthermore, there are expectations of measures to improve the ease of doing business, particularly for small businesses, and potential income tax relief to stimulate consumption and provide relief to the middle class.

Market and Investor Sentiment

To accommodate the Sunday budget presentation, the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have scheduled a special trading session. Investor sentiment remains cautious. The Indian rupee has faced pressure, recently touching a record low, and foreign investors have been net sellers of Indian equities, citing stretched valuations and global risks. The budget's announcements on fiscal discipline, capital gains tax, and policies to attract foreign investment will be critical in restoring investor confidence. The market will be closely watching for signals that the government can balance its growth ambitions with fiscal stability.

Navigating Global Trade Challenges

The budget is being formulated under the shadow of a challenging global trade environment. The 50% tariffs imposed by the United States continue to affect export-oriented industries. In response, the government has been actively pursuing trade diversification, including a landmark Free Trade Agreement (FTA) with the European Union. The budget is expected to reinforce this strategy with policies aimed at supporting exporters, diversifying export markets, and reducing logistical costs to make Indian goods more competitive globally.

Conclusion: A Balancing Act for Sustained Growth

Union Budget 2026 is poised to be a carefully crafted financial plan that balances the immediate need for growth with the long-term imperative of fiscal discipline. Finance Minister Nirmala Sitharaman's ninth budget will likely focus on structural reforms, increased capital spending, and targeted support for key sectors to navigate global uncertainties. The ultimate goal is to ensure that India's economy remains on a high-growth trajectory while strengthening its macroeconomic fundamentals for a stable and prosperous future. The detailed proposals, to be unveiled at 11 a.m., will set the economic roadmap for the nation for the coming year.