Union Budget expected to renew focus on jobs, rural demand and sustainable development to drive India toward a $5 trillion economy

Union Budget Expectations

• Budget needs to reignite the domestic growth engine
• Budget needs to find delicate balance between fiscal discipline and strategic government borrowing
• Budget needs to provide targeted support for both capital expenditure and consumption

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The Union Budget 2026 comes at a critical juncture. We're navigating some real headwinds as corporate earnings have been sluggish, nominal GDP growth has taken a marginal hit, and tax revenues haven't kept pace with expectations. Adding fuel to the fire are the geopolitical complexities we're witnessing, such as the US tariff measures, gold prices climbing, and the resulting depreciation of the Rupee.

Against this challenging backdrop, the Budget has its job cut out. It needs to reignite the domestic growth engine. It needs to find a delicate balance between fiscal discipline and strategic government borrowing. And it needs to provide targeted support for both capital expenditure and consumption.

When it comes to government spending, we believe the FY26 capex estimate of Rs 11 lakh crore may be difficult to achieve. With the increased focus on fiscal consolidation, we're expecting Capex growth to track roughly in line or slightly higher than nominal GDP growth. There is likely to be an increased allocation towards defence capex, given the geopolitical environment we're operating in. We expect the overall Capex/GDP to be steady around 3-3.1% of GDP for FY27, not unlike FY26, indicating disciplined, rather than aggressive expansion.

In terms of fiscal realities, we're expecting a shortfall in tax revenue. But with the government taking a disciplined approach by trimming subsidies and being more calibrated with capex spending, the FY26 fiscal deficit target of 4.4% of GDP should be achievable.

For the longer term, the government will aim to bring the debt-to-GDP ratio down to around 50% by FY31, a clear indication of fiscal consolidation. For FY27, we're expecting the fiscal deficit to hold in the 4.3-4.4% range—essentially flat versus FY26.

The Budget needs to support both capex and consumption without making any dramatic cuts to capex below a critical 3% of GDP threshold, to avoid growth hindrances. There is likely to be renewed emphasis on job creation, rural demand and sustainable development to propel the country toward a $5 trillion economy.

When it comes to market expectations our view is measured. Investors should focus on policy continuity and stability. The finance ministry will endeavour to avoid any disruptive tax moves that could rattle sentiment or strain the fiscal framework. Budget day volatility would be something to watch out for. If stimuli fall short or fiscal targets slip, it could potentially raise bond yields and tighten liquidity.

In terms of sectors to track, we have identified a few potential ones such as:

Defence: We see a potential double-digit allocation for defence capital expenditure to drive modernisation, R&D and indigenous manufacturing with a focus on Unmanned Aerial Vehicles (UAV)/Drone tech, Air Defence & Anti-drone systems.

Railways: The Indian Railways is expected to receive a boost in Capex to accelerate infrastructure modernization, with a major focus on safety (Kavach: Train Collision Avoidance System) and capacity augmentation.

NBFC-MFI: A larger Credit guarantee scheme is on the cards for NBFC-MFIs to help them raise funds and lend to low-income borrowers, specially in underserved markets and alleviate asset quality.

Fertilisers: A potential increase in subsidy of Rs 1.7 – 2.0 lakh crore will help combat higher raw material prices and push indigenous production.

Affordable housing: There is a strong thrust to redefine "affordable housing" to align with current market prices and increase the price cap from Rs 45 lakh to Rs 65–90 lakh in metros, allowing more projects to qualify for the 1% GST rate.

Precious metals: A potential import duty on precious metals, may benefit Gold lending NBFCs which may prove to be favourable investment avenues.

Besides, the government is also likely to work on initiatives to shield exporters in sectors like Textiles, Engineering, Auto Ancillaries, and Chemicals to combat the likely impact from high tariffs imposed by the US. We believe key incentives for affected sectors like targeted duty rationalisation, expansion of PLI Schemes, Green Manufacturing incentives like tax breaks for adopting Green energy; and a thrust for market diversification to alternative, low-duty markets will be the strategic way forward and build our resilience in this shifting global landscape.