In 2025-26, the Union government threw the kitchen sink at reviving growth and mass sentiment via a big boost to disposable incomes through an income tax reduction in the last Budget followed by a mid-year Goods and Services Tax (GST) cut. These decisions came in the background of a political reverse for the Bharatiya Janata Party (BJP) in the 2024 elections.
The BJP has more than recovered from these political reverses by now. This year’s Budget seeks to exploit this political comeback and convert it into long-term economic prowess in the face of a rapidly deteriorating external environment. This is pretty much the overarching focus of the 2026-27 Union Budget presented by finance minister Nirmala Sitharaman.
“Our government’s sankalp [resolve] is to focus on our poor, underprivileged and the disadvantaged. To deliver on this sankalp, and given that this is the first Budget prepared in Kartavya Bhawan, we are inspired by 3 kartavya,” Sitharaman said in Parliament.
”Our first kartavya is to accelerate and sustain economic growth, by enhancing productivity and competitiveness, and building resilience to volatile global dynamics. Our second kartavya is to fulfil aspirations of our people and build their capacity, making them strong partners in India’s path to prosperity. Our third kartavya, aligned with our vision of Sabka Sath, Sabka Vikas [equitable development for all], is to ensure that every family, community, region and sector has access to resources, amenities and opportunities for meaningful participation,” she added.
The key takeaways from the Budget are reflective of what this government and the finance minister have been known for: fiscal prudence (the first deficit will come down to 4.3% from 4.4%); prioritisation of capital expenditure over revenue expenditure (the latter, excluding grant-in-aid for capex, has fallen below 70% of total spending now); and a clear objective of making India a developed country (Viksit Bharat) by 2047 by focusing on specific sectors and tasks. The inherent hope in the Budget is that nudges will continue to be as important as tangible fiscal allocations in generating economic momentum. To be sure, some sense of continuity about the Budget is inevitable, given the fact that Sitharaman became the first finance minister to have presented nine consecutive Budgets.
Prime Minister Narendra Modi said the budget will provide India’s “Reform Express” fresh impetus. “This budget is the foundation for our journey towards a Viksit Bharat by 2047. This year’s budget will give India’s reform express new energy and new momentum,” he said.
If there was one declaration in the budget which acknowledged that India’s goal of becoming a developed country cannot be realised with riding the Artificial Intelligence wave – a technology which is being described as much more than a generational disruption – it was the extraordinary 21-year long tax holiday till 2047 to foreign companies using data centres in India to serve outside entities. To complement this effort, the budget has also proposed setting up of a dedicated rare earth corridor in the country, which should reduce import dependency in building such infrastructure. To be sure, the Budget also accepts, perhaps for the first time, that AI will entail both tailwinds as well as headwinds for India. It has proposed a committee to “assess (among other things) the impact of emerging technologies, including AI, on jobs and skill requirements” while declaring an ambition to take India’s share in global services to 10%.
In a slight pivot to India’s manufacturing strategy, the Budget has now announced incentives for things such as pharma, construction and engineering goods, shipping containers and toll equipment along with policy support to labour intensive manufacturing such as textiles and sports goods even as customs duties have been slashed for sectors such as nuclear power. This suggests that the government will continue to pursue import substitution as an idea from non-tariff routes which are linked to actual rather than notional protection to industry even as it makes concessions in select areas such as nuclear power to harness larger strategic objectives.
Then there are potentially big bang announcements where the devil might lie in the details which are yet to be announced. A proposed high-level committee on banking for Viksit Bharat — the finance minister said the terms of reference will be published soon — is one such thing and could be a game changer if it leads to radical reforms in things such as commercial banks funding infrastructure, government owned banks becoming more professionally managed or a change in the terms of trade between India’s banking and the rapidly growing non-banking sectors. Similarly, the Budget speaks about a comprehensive review of Foreign Exchange Management Rules to “create a more contemporary, user-friendly framework for foreign investments, consistent with India’s evolving economic priorities”.
As far as its immediate impact on sentiment is concerned, the Budget is a mixed bag of sorts. Announcements such as an increase in Securities Transactions Tax (STT) on futures and options have spooked financial markets. The BSE Sensex closed 1.88% lower while trading on a Sunday which might have kept big Foreign Portfolio Investors away. On the other hand, there are announcements such as lower Tax Collection at Source (TCS) requirements under the Liberal Remittance Scheme and imports for personal consumption which should at least please a section of the upper middle class. The budget also talks about easing compliance requirements for non-resident Indians in real estate and financial markets in the country.
How credible is the larger fiscal calculus of the Budget? A 10% nominal GDP growth assumption, given the Economic Survey’s assumption of a 6.8%-7.2% real growth rate, suggests that the Budget is hoping that inflation will rise enough to support the fisc without overwhelming the economy at large. It will definitely be a relief over this year’s situation when the nominal growth came at a paltry 8%.
One of the most important things as far as this year’s Budget was concerned was the 16th Finance Commission (FC) awards which take effect from 2026-27. There is not much of a change in headline tax devolution share of the states which has been kept at 41%. But a detailed study of FC awards shows that the government might have taken a step to address some of the heartburn regarding allocation of resources among individual states rather than states as a whole.
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