OPINION: Budget to emphasise targeted consumption support, boost capex amid muted private sector investment

Budget 2026 Expectations

With Union Budget 2026-27 around the corner, the market attention is firmly centred on how the government sets its growth strategy while balancing long-term infrastructure creation with near-term demand support. Public capital expenditure has been the cornerstone of India’s growth cycle. In the 2025-26 budget, the government allocated Rs 11.21 lakh crore for capital expenditure, marking a 10.1% increase over the previous year. Optimism is high that this allocation could rise by another 10-15% in the coming budget, particularly as private sector investment has remained muted in recent months. However, over the last three years, the Centre has consistently fallen short of fully utilising its budgeted capex allocations, largely because large infrastructure projects have long gestation periods and face implementation bottlenecks.

At the same time, fiscal discipline remains a key priority. The fiscal deficit for FY26 has been targeted at 4.4% of GDP, lower than the revised estimate of 4.8% in FY25. The FY27 target could be set lower, at around 4.2-4.3%. This limits the room for an aggressive and across-the-board capex expansion. As a result, Budget 2026-27 is likely to adopt a more selective approach, prioritising sectors with higher multiplier effects and strategic relevance. Railways, defence manufacturing, renewables, AI-led infrastructure, and data centres are expected to remain in focus, ensuring continuity in asset creation without straining public finances.

Within this backdrop, consumption has emerged as a key policy lever. Urban consumption has moderated, rural demand has shown early signs of recovery, and private investment has yet to display a decisive revival. Policy measures in 2025 have also provided meaningful support to households. Income tax rebates of up to Rs 12 lakh, GST rationalisation, and cumulative rate cuts of 125 basis points have improved liquidity conditions and boosted disposable income. Moderated CPI inflation, at 1.33% in December 2025 and remaining below the RBI’s lower tolerance band for several months, has further enhanced real purchasing power. Reflecting this support, India’s real GDP growth improved to 8.2% in Q2 FY26 from 7.8% in Q1 FY26, amid global uncertainties.

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Budget 2026-27 is likely to focus meaningfully on targeted consumption support. Measures could include further income tax relief, higher standard deductions, increased rural and agricultural spending, employment generation schemes, skilling initiatives, and focused welfare programmes. Such interventions offer quicker transmission to economic activity and help in strengthening demand without creating long-term fiscal stress.

Importantly, this shift does not signal a retreat from capital expenditure. Rather, it reflects a recalibration of priorities in an environment where fiscal headroom is limited and private capex remains cautious due to modest revenue growth and margin pressures. For markets, the most constructive outcome would be a budget that preserves growth momentum, supports consumption, and maintains credibility on medium-term fiscal consolidation. Infrastructure and manufacturing themes remain structurally intact, but consumption-oriented sectors may take centre stage in supporting domestic growth amid tariff-driven challenges.

Ultimately, Budget 2026-27 is less about choosing between capex and consumption and more about getting the mix right. Capital expenditure builds assets for future growth, while consumption spending supports demand today. The success of the budget will depend not just on headline allocations but on execution, fiscal discipline, and policy continuity.