OPINION | Budget 2026-27 must balance growth and fiscal discipline

The shift is structural and has meaningful implications for fiscal policy.

As India approaches the Union Budget, the core challenge before policymakers is clear: supporting growth while maintaining fiscal discipline, strengthening consumption, and deepening capital markets. The macro backdrop gives policymakers room to pursue these objectives with confidence.

Having crossed the $4 trillion mark, India’s growth reflects a structural shift rather than a cyclical upswing. Despite global headwinds such as geopolitical uncertainty, tariff pressures, and slowing world trade, the economy recorded 8.2% GDP growth in a recent quarter, with growth expected to moderate to 6.5–7% in the coming year. At the heart of this resilience is a revival in mass consumption, supported by a steady rural recovery and improving urban demand.

Consumption at an Inflection Point

Economic history offers a clear parallel. Countries such as the US, Japan and China witnessed sharp acceleration in consumption once per capita incomes crossed critical thresholds. With India’s per capita GDP now above $2,500, the country appears to be at a similar inflection point.

Unlike export-led models, India’s expansion is increasingly consumption-driven, powered by its expanding middle class. This shift is structural and has meaningful implications for fiscal policy, private investment and long-term growth sustainability.

Tax Reforms and the Middle-Class Multiplier

Recent tax reforms acknowledge this reality. Individuals earning up to ₹12 lakhs can now have zero tax liability. However, the middle class seeks greater predictability and headroom. Widely discussed expectations include raising the 30% tax bracket threshold towards ₹30–35 lakh, increasing the standard deduction, and enhancing deduction limits for health insurance and retirement savings.

Such measures can strengthen consumption and support private capital expenditure. On a broader canvas, further rationalisation between direct and indirect tax structures can widen the tax base, improve compliance, increase collections, and simultaneously fuel consumption—leading to higher production and job creation.

MSMEs, Credit Flow and Job Creation

MSMEs remain central to this cycle, given their critical role in employment generation and exports. Recent allocations of over ₹25,000 crores for export-linked credit reflect the right intent. Stronger and more accessible credit availability, combined with technology upskilling, can reinforce a virtuous loop linking jobs, income growth, consumption and private investment.

Sustained public investment, particularly in infrastructure and credit facilitation, will be key to crowding in private capital and maintaining growth momentum.

Capital Markets and the Rise of Household Investing

As incomes rise and financial confidence improves, household behaviour is also undergoing a structural transformation. India is witnessing a generational shift in household investing, redefining wealth creation. By early 2026, demat accounts have crossed 21.5 crore, monthly SIP contributions exceed ₹31,000 crores, and mutual fund assets stand above ₹80 lakh crore.

For the first time in India’s history, wealth creation through capital markets is becoming a mass-market phenomenon. Tier-2 and Tier-3 cities are now key drivers, with retail investors accounting for over 45% of cash market turnover. Rising domestic ownership alongside moderated foreign participation signals a more self-reliant ecosystem.

Against this backdrop, the upcoming Budget is expected to focus on four priorities: putting more disposable income in middle-class hands, easing access to credit for businesses, strengthening incentives for long-term wealth creation, and accelerating investment in financial innovation.

Targeted support for AI adoption in financial services—through data infrastructure, skilling and regulatory clarity—can improve credit underwriting, fraud prevention and risk management. Simplifying cross-border taxation and reducing compliance-heavy regimes will further deepen markets.

Smart, targeted policy choices focused on cleaner tax structures, easier credit and long-term investing incentives can convert today’s consumption recovery into sustained capital formation and help define India’s next phase of growth.

(Anshul Arzare, MD & CEO, Yes Securities.)

Views are personal and do not represent the stand of this publication.