The Union Budget 2026–27 reaffirms the government’s resolve toward fiscal consolidation while sustaining long-term, infrastructure-led growth trajectory in a world of torrid geopolitics, multilateralism & bilateral arrangements. Presented amid moderating global growth, stable inflation, and geopolitical uncertainty, the 2026–27 Budget adopts a measured, incremental approach rather than “big-bang” reforms. It aligns with long-term national priorities, including the Viksit Bharat 2047 vision and the newly concluded India–EU Free Trade Agreement, which seeks to deepen economic relations, rationalize cost structures, and enhance India’s global competitiveness. Execution, however, remains key to realizing these ambitions.

With nominal GDP growth moderating to 8% in FY26 from historical double-digit levels, the Budget targets a fiscal deficit of 4.3% of GDP while raising capital expenditure by 11.5% to INR 12.2 lakh crore, balancing fiscal prudence with sustained public investment momentum. Notably, the Budget marks a significant policy transition—from a fiscal deficit-based anchor to a debt-based fiscal framework—reflecting a more mature and globally aligned fiscal architecture that prioritizes medium-term debt sustainability over annual deficit targeting.

Key priorities include sustained infrastructure push, targeted incentives for strategic manufacturing segments such as semiconductors, bio-pharma, and electronics, and structural reforms to strengthen India’s services export base. However, higher-than-anticipated gross borrowings of INR 17.2 lakh crore and an increase in the Securities Transaction Tax (STT) could exert near-term pressure on market sentiment.

Fiscal Framework

Deficit and Debt Trajectory

The fiscal deficit for FY27 is budgeted at 4.3% of GDP, representing a modest 10 bps consolidation from FY26's 4.4%. This measured pace reflects the government's pivot toward long-term capacity building after successfully anchoring the deficit below 4.5%. The government remains committed to reducing central debt-to-GDP to approximately 50% (±1%) by FY31, from 56.1% in FY26. However, this trajectory requires sustained nominal GDP growth of 10%+ annually.

Particulars	FY26 RE	FY27 BE	Growth
Fiscal Deficit (INR lakh crores)	15.6	17	9%
Fiscal Deficit (% GDP)	4.4	4.3	-10 bps
Central Debt (% GDP)	56.1	55.6	-50 bps
Revenue Deficit (% GDP)	1.5	1.5	Flat

Revenue Assumptions: Achievable but Tight

Gross tax revenue growth remains conservative at INR 44 lakh crs, with tax buoyancy below the long-term average, primarily reflecting the impact of GST rate rationalization implemented in September 2025. While headline GST collections appear subdued, underlying growth remains healthy at 10.4% after adjusting for rate cuts. Corporate and personal income tax growth of 11% & 11.7% are supported by stable profitability and improved compliance. Non-tax revenues remain broadly flat at INR 6.7 lakh cr, with PSU and RBI dividends staying steady and realistic given current balance sheet strength. The disinvestment target of INR 80,000 crore has been raised significantly but remains ambitious, as historical execution has consistently fallen short of budgeted levels, making achievement uncertain despite theoretical feasibility through stake sales in listed PSUs.

Expenditure Composition: Quality over Quantity

Expenditure Category	FY26 RE	FY27 BE	Growth
Revenue Expenditure	38.7	41.3	6.60%
Interest Payments	12.7	14	10.20%
Subsidies	4.3	4.1	-4.50%
Pensions	2.9	3	3.30%
Capital Expenditure	11	12.2	11.50%

Table 2: Expenditure breakdown (INR lakh crores)

Total expenditure growth continues to undershoot nominal GDP expansion for the sixth consecutive year, reflecting deliberate fiscal restraint. Revenue expenditure growth is driven primarily by rising interest payments due to higher debt stock, while subsidies continue gradual normalization with food and fertilizer allocations remaining broadly stable. Capital expenditure shows meaningful acceleration after modest growth in the prior year, aligning with nominal GDP and extending the multi-year infrastructure push.

Including extra-budgetary resources through PSU bonds and internal accruals, total infrastructure spending demonstrates double-digit growth, underscoring the government's commitment to sustaining the capex-led growth strategy despite fiscal consolidation pressures. Central government capex is budgeted to grow by 11.5% year-on-year, remaining at 3.1% of GDP in FY27. When combined with grants for asset creation and public enterprise investments, consolidated public sector capex is expected to rise to 5.6% of GDP, up from 5.1% in FY26.

Source: Nomura, Budget Document 2026

Borrowing Program: A Market Concern

Gross market borrowings for FY27 are set at INR 17.2 lakh crores, above market expectations of INR 16.0-16.5 lakh crores. Additionally, short-term T-Bill issuances of INR 1.3 lakh crores are planned (vs. negligible net issuance in FY25-26). This elevated supply creates near-term pressure on bond yields. The absence of measures to boost domestic bond demand—alongside tight liquidity conditions—suggests RBI will need to conduct Open Market Operations (OMOs) throughout the year to absorb supply. The higher-than-expected borrowing is a negative for bond markets, particularly at a time when both central and state government issuances remain elevated. Given that the government’s debt maturity profile is long ended, rates are likely to move higher from here, though adherence to the debt-to-GDP trajectory supports long-term bond market stability.

Sectoral Allocation and Policy Initiatives

Infrastructure: Sustained Momentum

The Budget allocates INR 12.2 lakh crores to central capex, with key ministries seeing robust growth:

Ministry/Sector	FY26 RE	FY27 BE	Growth
Railways	2.65	2.93	11%
Roads & Highways	2.72	2.94	8%
Defense	2.01	2.35	17%
Power	0.86	1.02	18%
Urban Development	1	1.07	7%
Transfers to States	1.75	2.26	29%

Source: Budget Document 2026

New infrastructure initiatives include seven high-speed rail corridors connecting major metro regions, additional dedicated freight corridors to enhance logistics efficiency, and an Infrastructure Risk Guarantee Fund offering partial credit guarantees to de-risk private financing. Waterways expansion targets 20 new National Waterways over five years, with ship repair hubs at Varanasi and Patna, while a Coastal Cargo Promotion Scheme aims to shift cargo from road and rail to waterways. Housing allocations see sharp increases under PMAY for both rural and urban segments, while Jal Jeevan Mission funding rises significantly after substantial underspending in FY26, signaling renewed focus on execution and water infrastructure delivery.

Manufacturing and Industrial Policy

The Budget introduces ambitious manufacturing initiatives aimed at deepening domestic value addition and supply chain resilience. India Semiconductor Mission 2.0 significantly expands the semiconductor outlay with INR 40,000 cr allocation, shifting focus from assembly to full-stack Indian IP development and equipment manufacturing. Bio-Pharma SHAKTI allocates substantial funding of INR 10,000 crs over five years to build a biologics and biosimilars ecosystem, integrating pharmaceutical research institutes, establishing globally accredited clinical trial sites, and strengthening regulatory capabilities—pivoting India from volume-led generics to a value-led bio-pharma hub. The Electronics Components Manufacturing Scheme is enhanced to deepen supply chain localization, while Rare Earth Corridors across four states aim to develop critical mining, processing, and manufacturing capabilities essential for EV and defense industries. Additional initiatives include dedicated chemical parks, construction equipment and container manufacturing schemes, and rejuvenation of legacy industrial clusters through infrastructure and technology upgradation, collectively targeting strategic self-reliance and global competitiveness.

Services Sector

Global Competitiveness: The Budget introduces transfer pricing reforms for IT and GCCs with a unified 15.5% safe harbor margin, expanded eligibility thresholds, and automated approvals, reducing compliance burden and enhancing tax certainty for the sector. A tax holiday until 2047 for cloud service providers creates structural tailwinds for India's emerging data center ecosystem. In medical tourism, five regional hubs under PPP and expanded emergency care capacity by 50% position India to capture greater market share, benefiting healthcare infrastructure players. Investments in hospitality training, guided upskilling programs, and development of archaeological sites support sustained growth in tourism-related sectors, creating opportunities across the hospitality value chain.

Rural Economy and Employment: Rural spending sees mixed signals. While headline allocation to rural schemes increases 14% to INR 12.7 lakh crores. MGNREGA funding declines sharply from INR 88,000 crore to INR 30,000 crore. However, the new VB-GRAM scheme allocation of INR 95,600 crore increases combined rural employment support by 42%. Fertilizer subsidies are reduced 8%, while food subsidies remain stable at INR 2.3 lakh crore. PM-Kisan stays unchanged at INR 63,500 crore, and rooftop solar funding rises modestly to INR 22,000 crore, reflecting selective prioritization within rural welfare. But structural challenges persist in employment quality, with agriculture still employing a disproportionate share of the workforce, constraining consumption potential despite headline growth.

Securities Transaction Tax (STT) Increase:

The most market-sensitive change: STT rates increased across equity derivatives:

Instrument	Old Rate	New Rate	Change
Futures	0.02%	0.05%	150%
Options (premium)	0.10%	0.15%	50%
Options (exercise)	0.13%	0.15%	20%

Source: Budget Document 2026