Markets may debate it, but Budget 2026 chose realism for a quiet reset in policy priorities

Harish Krishnan is the CIO – Equity at Aditya Birla Sun Life AMC

• Budget reinforces government’s commitment to its medium-term fiscal consolidation path
• Baton appears to be passing from supply-side stimulus to domestic consumption support
• Budget unlikely to materially alter the medium-term outlook for equities

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In an era marked by elevated global uncertainty, India’s Union Budget 2026 stands out for what it resists as much as for what it delivers. While several major economies continue to rely on prolonged fiscal excess, unconventional policy tools, and uncertain trade postures, India has chosen a steadier course – anchored in realism, fiscal prudence, and calibrated prioritisation.

At its core, the Budget reinforces the government’s commitment to its medium-term fiscal consolidation path. This consistency is notable, particularly at a time when global macro conditions could have justified looser purse strings. Instead, policymakers have stayed the course, signalling confidence in India’s underlying growth dynamics and a preference for stability over headline-grabbing announcements.

That said, there is a discernible shift in the composition of fiscal support. In the post-pandemic years from FY21 to FY24, the central government ran an aggressive supply-side stimulus, led by infrastructure spending and public investment. Capital expenditure growth during this period averaged an impressive 31%, laying the foundation for medium-term productivity gains and crowding in private investment.

From FY25 to FY27 (Budget Estimates), however, capex growth moderates to about 10% on average. While this marks a deceleration, it is important to recognise that spending remains elevated on a significantly higher base – effectively keeping the economy in fourth gear rather than accelerating further.

More importantly, the baton appears to be passing from supply-side stimulus to domestic consumption support. Revenue expenditure, which grew at an average of 4% between FY21 and FY24, has risen to around 7% in FY26 and FY27 (BE). This rebalancing suggests a conscious policy choice to bolster household demand, recognising its role as a stabilising force amid global volatility.

From a bond market perspective, this prudence is not without near-term friction. Higher-than-expected gross borrowing could create some discomfort, even if the surprise is modest. The implication may be a marginal uptick in the cost of capital, an outcome the monetary authority may need to manage through liquidity operations, maturity adjustments in issuance, or other policy tools.

On the macro assumptions front, the FY27 Budget Estimates appear conservative. The implied improvement in nominal GDP growth to around 10% leaves room for upside surprises. In an uncertain global environment, such conservatism provides valuable flexibility – allowing potential gains to be redeployed, should growth outperform expectations.

Equity markets, meanwhile, will need to digest selective measures. The increase in securities transaction tax on derivatives comes as a mild surprise, aimed at tempering excessive participation in the futures and options segment. Notably, there were no changes to long-term capital gains taxation, offering continuity for both domestic and foreign investors. Some easing of buyback norms could help mature companies return surplus capital, enabling its redeployment into newer, capital-intensive opportunities across the economy.

Overall, the Budget is unlikely to materially alter the medium-term outlook for equities. Rather, it reinforces the view that the past 15 months have marked a reset – shaped by geopolitical shifts and global macro uncertainty. For investors, this is a reminder to look ahead with a fresh lens. Over the next three to four years, a new set of themes and sectors is likely to emerge as leaders, distinct from the investment-heavy winners of 2021–2024.

Seasonally, the first quarter has often been challenging for Indian equities. If history rhymes, any near-term volatility could offer a constructive entry point for building portfolios aligned with India’s evolving growth narrative.