Budget 2026: Fiscal prudence, support for manufacturing, capex push top market's wishlist

Vaibhav Sanghavi, CEO, ASK Hedge Solutions

• India targets fiscal deficit of 4.4% of GDP for FY26, aiming for macro stability
• Manufacturing, FDI/FPI reforms, and AI infrastructure are key Budget priorities
• Strategic divestments and tax base widening to support capex and growth

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Vaibhav Sanghavi, CEO, ASK Hedge Solutions

As India enters a new fiscal year, markets are likely to reward a Budget that preserves macro stability while accelerating the next leg of private-capex and productivity-led growth. The policy challenge is to sustain high trend growth without re-opening the fiscal spigot, especially when global rates, geopolitics and supply chains remain uncertain. India’s recent fiscal strategy has been broadly credible: the Centre has reiterated a consolidation path, with the fiscal deficit targeted at 4.4 percent of GDP for FY26 and a stated intent to keep the glidepath intact.

1) Fiscal prudence remains the market’s anchor

Bond markets care less about headline announcements and more about the durability of consolidation. The FY26 deficit target (4.4 percent) and the broader FRBM-aligned roadmap signal continued discipline, which should help contain term premia and crowd-in private credit over time. A prudence-first approach is also consistent with sustaining India’s capex push without destabilising debt dynamics, particularly as interest payments already form a meaningful share of expenditure.

2) Manufacturing support is key

If India’s "Viksit Bharat" ambition is to be job-rich (not just GDP-rich), manufacturing has to do more heavy lifting. The PLI architecture has begun shifting the export mix toward higher value-added categories and enabling scale. Government-reported outcomes indicate ~₹1.61 lakh crore investment, ~₹14 lakh crore production/sales, exports exceeding ~₹5.31 lakh crore, and employment impact of over ~11.5 lakh (direct + indirect) under PLI implementation progress. A pro-manufacturing Budget should therefore prioritize logistics, industrial clusters, power reliability, and trade facilitation—so that incentives translate into globally competitive cost curves.

3) India needs 'humongous' capital for 2047 — reviving FDI/FPI is essential

A credible development aspiration requires an investment step-up. The World Bank estimates India would need to raise the investment rate from ~33.5% of GDP to ~40% by 2035, alongside reforms that deepen integration with global markets, to plausibly reach high-income status by 2047. In that context, policies that unequivocally improve the ease of FDI/FPI—stable rules, faster approvals, predictable taxation, and frictionless repatriation—become macro-critical. Recent data show gross FDI inflows of USD 81.04 bn in FY25 (+14% YoY), with manufacturing FDI also rising, underscoring the payoff from investor-friendly policy clarity. Every progressive country in the world wants to attract capital for growth, and we are competing within the same capital pool. Thus, our taxation policies and ease of access should not only be alike but also best in class. We need a much more practical approach, which our current Government is very capable of.

4) Tax reforms: a strong start but the real prize is a wider base

India’s tax capacity improves most sustainably when compliance rises, and the base broadens. GST is a good example, reflecting formalisation and better compliance. Continued rate rationalisation, fewer exemptions, and simpler dispute resolution can further reduce compliance costs—helping widen the base and focusing on reducing rates.

5) Strategic divestments: unlock resources and improve price discovery

With India’s capex needs large and persistent, strategic divestments can be a non-distortionary way to raise resources while improving efficiency. Budget documents and commentary suggest the government continues to budget “miscellaneous capital receipts” (including disinvestment/asset monetisation) rather than setting a single headline disinvestment number—yet the market would welcome a clear, time-bound pipeline and execution cadence. A mission-mode approach—especially in assets where private management improves outcomes—can enhance valuation realisation and credibility simultaneously.

6) 'Out-of-the-box' metric: target business growth, not only tax growth

Budgets often set tax-revenue growth “asks” for the revenue department. A more growth-maximising framing would be to set measurable targets for industry expansion, formal employment creation, and investment growth—because a larger economic pie typically delivers stronger, more durable tax buoyancy. The sharp rise in GST collections over time already illustrates how formalisation and growth can lift revenues without excessive rate pressure.

7) AI as the next UPI moment: indigenous LLMs and the compute stack

AI is rapidly becoming “general-purpose infrastructure.” India has begun building the rails: the Cabinet-approved IndiaAI Mission (outlay ₹10,371.92 crore over five years) explicitly includes compute capacity (10,000+ GPUs via PPP), datasets, and the development of indigenous foundational/large multimodal models. Follow-through matters—especially investments across data centres, GPUs/accelerators, and hardware supply chains—so India can avoid strategic dependence while enabling domestic productivity gains across sectors.

Bottom line for markets

A pro-business, pro-growth, pro-reform Budget—anchored in fiscal prudence, manufacturing scale, frictionless capital flows, continued tax-base widening, credible divestment execution, and mission-mode AI infrastructure—would likely be welcomed by both equities and bonds. Fiscal credibility lowers the cost of capital; reforms lift the return on capital. That combination is the most durable “market expectation” India can offer.