Union Budget 2026: FM Sitharaman Targets 4.3% Fiscal Deficit and 12.2 Lakh Crore Capex

Finance Minister Nirmala Sitharaman presented the Union Budget for 2026-27 in the Lok Sabha on Sunday, marking her ninth consecutive budget. Underlining that the fundamentals of the Indian economy remain strong, the Finance Minister noted that global uncertainties have impacted many sectors and were a primary consideration during the budget preparation. The budget projects a real GDP growth of 7.4% for FY26, positioning India as a resilient growth engine amid a fractured global trade order.

The government has maintained a focus on structural reforms, fiscal prudence, and monetary stability. The budget outlines a clear roadmap towards the vision of Viksit Bharat by 2047, balancing economic ambition with social inclusion. Despite global disruptions in supply chains and rising demands on energy and critical minerals, the Finance Minister emphasized that India will continue to take confident steps toward long-term stability and growth.

Macroeconomic Stability Amid Global Volatility

Addressing a press conference after the budget presentation, the Finance Minister stated that global uncertainty occupies the minds of policy officers but is not the sole cause for any specific step. She highlighted that India's macroeconomic fundamentals are sound, even as the world faces unpredictable currency fluctuations and trade barriers. The government has taken internal measures to ensure that the Indian rupee remains stable and that domestic sectors are shielded from external volatility.

The budget proposes several schemes to support domestic sectors such as MSMEs, textiles, leather, and the rural economy. These measures are designed to reach small-scale contributors and exporters, ensuring they do not face significant life changes due to international market fluctuations. The focus remains on keeping inflation under control while maintaining a high growth rate of around 7%.

The Capex Push: Driving Infrastructure Growth

A central pillar of the 2026-27 budget is the continued thrust on public investment. The government has proposed to increase capital expenditure to 12.2 lakh crore, up from 11.2 lakh crore in the previous year's budget estimates. This manifold increase from 2 lakh crore in 2014-15 signals the government's intent to sustain infrastructure-led growth. The focus areas include roads, railways, ports, logistics, and urban infrastructure.

This elevated capital expenditure is intended to bridge the gap where private investment recovery remains uneven. By investing in modern infrastructure, the government aims to unlock agglomeration-led growth, particularly in Tier-II and Tier-III cities. The budget also introduces City Economic Regions with an allocation of 5,000 crore per region over five years to develop robust economic centers.

Fiscal Consolidation: A Gradual Approach

The Finance Minister noted that the fiscal deficit target for FY27 has been set at 4.3% of the GDP, marginally lower than the 4.4% estimated for FY26. She explained that drastic fiscal measures often cause economic turbulence, and a gradual reduction is a more responsible and realistic path. The goal is to ensure steady growth without bringing instability to the domestic market.

With a new fiscal roadmap, the budget proposes lowering the Central Government debt-to-GDP ratio to 55.6% for the 2026-27 period. While some analysts have expressed concerns regarding the pace of debt reduction, the government maintains that fiscal deficit remains the operational target to attain long-term debt sustainability. The focus is on prudent management that builds investor confidence.

Support for MSMEs and Manufacturing

MSMEs remain the backbone of the Indian economy, contributing nearly 30% to the GDP. To support this sector, the budget has doubled the MSME credit guarantee to 10 crore and established a 10,000 crore fund-of-funds. These initiatives aim to address challenges such as high borrowing costs and limited access to global markets.

The National Manufacturing Mission has been introduced for sectors like footwear, toys, and solar PV. A dedicated scheme aims to create 22 lakh jobs in the leather and footwear export sectors. By reducing compliance through simplified digital processes and scaling platforms like ONDC and GeM, the government seeks to integrate MSMEs into global value chains.

Strategic Autonomy: Semiconductors and Rare Earths

To reduce import dependence and strengthen strategic autonomy, the budget highlights major announcements in the semiconductor and electronic components manufacturing sectors. The government is also establishing rare earth corridors to meet domestic requirements for critical materials. These frontier sectors are expected to increase productivity and attract new long-term investments.

Taxation Reforms and the New Income Tax Bill

A significant highlight of the budget is the proposal for a new Income Tax Bill to be introduced next week, aimed at trust-based compliance. The budget rationalizes TDS and TCS structures, including hiking the TCS threshold to 10 lakh and the rent TDS limit to 6 lakh. For the salaried class, the standard deduction is expected to see a hike to 1 lakh, and the Long-Term Capital Gains (LTCG) exemption may rise to 2 lakh under the new regime.

These reforms are designed to improve the ease of living and provide targeted relief to taxpayers at the lower end of the income spectrum. The government also aims to reduce supply-side frictions, giving foreign investors the confidence to reinvest earnings in India. The extension of ITR filing timelines to four years is another step toward simplifying tax administration.

Market Impact and Analysis

The market has reacted to the budget with a focus on the sustained capex and the realistic fiscal deficit target. While the reduction in the deficit is gradual, it provides a sense of stability to the bond markets. The emphasis on manufacturing and green energy sectors like carbon capture (allocated 20,000 crore) is expected to drive interest in related stocks.

Conclusion

Union Budget 2026-27 reflects a balance between growth-oriented spending and fiscal responsibility. By prioritizing capital expenditure and structural reforms in frontier sectors, the government aims to maintain India's position as a fast-growing economy. The focus now shifts to the implementation of these schemes and the upcoming legislative changes in the taxation framework, which will define the economic trajectory for the remainder of the decade.