Union Budget 2026-27 Highlights: Fiscal Discipline, Capex Push and Sectoral Winners
Feb 2, 2026
AdvisorAlpha
The Union Budget 2026-27 needs to be viewed through the lens of all-round tax rationalisation undertaken in FY26, spanning income tax reforms and GST restructuring. While these measures led to a shortfall in tax collections, the Government of India (GoI) has largely held the fiscal line, signalling credibility and restraint rather than populism.
With the fiscal deficit pegged at 4.3% of GDP, the budget reinforces the medium-term consolidation path while continuing to prioritise infrastructure, manufacturing, logistics, and social development.
Macro Snapshot: Conservative Assumptions, Fiscal Control
The government has consciously avoided aggressive assumptions for FY27, opting instead for realism:
Nominal GDP growth assumed at 10%
Tax collections projected to grow by ~10%
GST collections expected to decline by ~3%
Excise duty projected to rise by ~15%, with cigarettes as a key contributor
Defence spending growth remains modest
Central government capex trimmed by ~3%, while overall capex (including states) rises sharply
Despite weaker revenue visibility, the government has managed to stay within fiscal targets by:
Reducing revenue expenditure
Curtailing subsidy outlays
Lower state-level capex spending
This underscores a clear policy intent: fiscal discipline first, stimulus via capex—not consumption giveaways.
Fiscal Math at a Glance (FY27 BE)
Metric | FY26 (RE) | FY27 (BE) |
Fiscal Deficit (% of GDP) | 4.4% | 4.3% |
Capex (ex grants, ₹ tn) | 11.0 | 12.2 |
Capex growth (incl. states) | — | 22% |
Gross Borrowings (₹ bn) | 14,610 | 17,200 |
Net Borrowings (₹ bn) | 11,328 | 11,732 |
Income Tax Collections (₹ bn) | 13,120 | 14,660 |
GST Collections (₹ bn) | 10,465 | 10,190 |
Key takeaway:
While gross borrowings rise sharply, the net borrowing increase (~9%) remains manageable, limiting crowding-out risks.
Subsidy Rationalisation: Structural Improvement
The budget continues the trend of subsidy rationalisation, freeing fiscal room for productive spending:
Fertiliser subsidy down 8% YoY
Food and petroleum subsidies reduced
Shift from blanket subsidies to targeted welfare delivery
This structural cleanup improves fiscal quality without compromising welfare priorities.
Capex-Led Growth: Infrastructure Still the Anchor
The government has reinforced its long-term growth strategy through a capex-heavy allocation, especially when state grants are included.
Key Infrastructure Themes:
Urban infrastructure and Tier II/III city development
High-speed rail corridors (7 announced growth connectors)
Dedicated freight corridors & national waterways
Logistics clusters and port modernisation
Data centre infrastructure supported by tax holidays till 2047
This multi-year capex visibility is supportive of capital goods, cement, metals, construction equipment and EPC players.
Manufacturing & Strategic Sectors: Policy Continuity
Key Policy Pushes:
Rare earth permanent magnet corridors across Odisha, Kerala, Andhra Pradesh and Tamil Nadu
ISM 2.0 with ₹40,000 crore outlay to deepen India’s semiconductor ecosystem
BioPharma Shakti: ₹100 billion push for biologics and biosimilars
Aerospace & defence manufacturing supported via BCD exemptions
CCUS incentive scheme (₹20,000 crore over five years) for hard-to-abate sectors
The message is clear: localisation, supply-chain security and import substitution remain core priorities.
Banking, MSMEs & Capital Markets
MSME & Credit Ecosystem:
₹10,000 crore SME Growth Equity Fund
₹2,000 crore Self-Reliant India Fund top-up
TREDS mandated for CPSE purchases from MSMEs
Expanded CGTMSE support for invoice discounting
Capital Markets:
STT increased on futures (0.05%) and options (0.15%)
Buybacks taxed as capital gains for all shareholders
Higher promoter-level taxation to curb arbitrage
Assessment:
The STT hike appears aimed at cooling speculative F&O activity, potentially positive for long-term mutual fund participation, with no immediate material impact on AMCs.
Sectoral Impact Summary
Positives:
Banking & BFSI: MSME credit, governance reforms, manageable borrowings
Capital Goods & Infra: Capex visibility, railways, defence, power
Healthcare & Pharma: Medical hubs, cancer drug duty cuts, AHP expansion
Telecom & Data Centres: Tax holiday till 2047, cloud services growth
Renewables & Energy Transition: CCUS, biogas blending incentives
Mixed / Neutral:
Consumer: Benefits accrue gradually as FY26 tax reforms play out
Capital Markets: STT hike negative for traders, neutral-to-positive for investors
Market View: No Big Bang, But Structural Support Intact
The Union Budget 2026–27 does not offer immediate market triggers, but it extends the structural growth narrative built over the last few years.
The real economic impulse from:
Income tax rationalisation
GST restructuring
Interest rate transmission
…is likely to play out gradually through FY27, rather than immediately.
Investment Strategy: Preferred Sectors
We recommend staying overweight on:
BFSI
Select consumer names
Healthcare
Defence
Capital goods
Telecom
Final Take
Union Budget 2026-27 is a credibility-focused, fiscally responsible budget. It prioritises infrastructure creation, domestic manufacturing, and long-term competitiveness, while resisting the temptation of short-term stimulus.
For investors and businesses alike, the message is consistent:
India’s growth story remains capex-driven, structurally anchored, and policy-stable.
