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EXECUTIVE SUMMARY

Union Budget for FY26 is rooted in praxis, recognising that stimulating domestic consumption is the only antidote to an essentially volatile global scenario. The same has been attempted through bumper tax cuts for the middle class to boost urban consumption. On the rural front, a raft of agriculture schemes have been launched with the aim of maintaining consumption in the near term and making migration to urban areas an option rather than compulsion in the long term for rural youth. Targetted support for employment-generating MSMEs, coupled with a renewed emphasis on manufacturing through the National Manufacturing Mission, seeks to absorb this demographic dividend. While the expenditure mix has altered, government capex remains high, even as the nudge to the private sector is obvious. Crucially, fiscal prudence has not been sacrificed; with a firm commitment to a controlled fiscal deficit traje

Demand-side growth to bolster receipts and counter revenue impact of direct tax changes

Net tax revenues to the Union are expected to grow by 11.0% y/y to Rs. 28.4 trn (FY26BE vs. FY25RE), which is faster than 9.9% growth expected in FY25RE vs. FY24A. This relies on accelerated corporate tax collection growth of 10.4% to Rs. 10.8 trn, up from FY25’s envisioned 7.4% increase. Growth in income taxes is factored in at 14.4%, with large gains expected in collections of STT. While this would be the slowest annual growth rate since the pandemic period, it underscores a buoyant expectation given considerable revenue foregone of ~Rs. 1 trn due to change in direct tax code and susceptibility of STT collections to market conditions and changing F&O norms. Perhaps, the Union’s nominal GDP growth expectation for FY26, at 10.1% y/y, faster than FY25FAE at 9.7%, is rooted in the same optimism

Government’s focus turns a corner as agriculture and rural development mark increases in revenue expenditure

FY26BE total expenditure is projected at Rs. 50.6 trn, a 7.4% y/y increase, with central scheme allocations leading growth. This implies accelerated spending over the next 15 months, given moderate 9MFY25 velocity. Revenue expenditure is posited to rise of 7.4% to Rs. 39.4 trn, clocking a faster growth rate than seen in the last two fiscals. Significant allocation increases target agriculture (Rs. 1.7 trn, up 22%) and rural development (Rs. 2.7 trn, up 40%), including import substitution schemes for pulses and oils, and the new PM DDKY for 100 low-productivity districts. Health and education are expected to see healthy 12% rises in expenditure, in line with the government’s long-term vision. Interest expense is projected to grow 12% in FY26BE, while increased food subsidies may be partially offset by lower fertiliser subsidies.

Infrastructure push: private sector invited as capex remains strong

While capital expenditure is budgeted grown by 10.1% y/y vs. FY25RE to Rs. 11.2 trn, it remains flattish vis-à-vis FY25BE, with the government undershooting its FY25 target by ~Rs. 900 bn. There was no change made to capex outlay for either Roads (Rs. 2.7 trn in FY26BE) or Railways (Rs. 2.5 trn in FY26BE), which had hitherto seen large increases. Urban infrastructure received a significant boost with Rs. 1 trn allocated to establish the Urban Challenge Fund. The Finance Minister announced several measures to broaden capital expenditure from the Union to States and private sector. These include a 3-year pipeline of PPP projects, private sector access to the PM Gatishakti data portal, the second phase of the NMP through FY30 with Rs. 10 trn in reinvested capital, the extension of the Rs. 1.5 trn concessional capex loan to States in FY26, and leveraging NaBFiD for partial credit enhancement of infrastructure projects.

EXECUTIVE SUMMARY (2/2)

Strategic sector focus: Power remains strong, Shipping, Aviation, and New Industries join growth trajectory

The power sector continues to be a priority, with states eligible for additional borrowing of 0.5% of GSDP contingent on continued reforms. A Nuclear Energy Mission has been launched, targetting 100 GW of capacity by 2047 and encouraging private investment. The National Manufacturing Mission prioritises domestic clean technology manufacturing, benefiting sectors like solar cells, batteries, electrolysers, and wind turbines. Shipping received concessions, including large ships' inclusion in the infrastructure harmonised list and a new Maritime Development Fund. Aviation's UDAN scheme was modified to connect 120 new destinations.

Simplification and indigenisation the mantras behind the changes in indirect tax code

Customs tariffs for industrial goods will be simplified by eliminating seven rates and limiting levies to one cess or surcharge. Basic customs duty on key battery minerals has been reduced to zero. Further, 35 additional capital goods for EV battery manufacturing and 28 for mobile phone battery production have been added to the exempted list. Duty rationalization on panels/open cells supports domestic electronics manufacturing. These indirect measures complement broader initiatives to incentivize private investment in domestic manufacturing.

Bonanza for ‘middle class’ given in direct taxes with the hope of increased urban demand

Personal income tax slabs were realigned, exempting individuals earning up to Rs. 1.2 mn under the revised new tax regime. Senior citizen interest deduction limits doubled to Rs. 0.1 million. TDS on rent limits increased from Rs. 0.24 mn to Rs. 0.6 mn annually. LRS remittance TCS threshold raised from Rs. 0.7 mn to Rs. 1 mn. These measures aim to stimulate urban consumption, potentially boosting durable goods demand. Long-term benefits may include increased tax formalisation and broader credit access.

Financial sector reforms fast-tracked with several gifts for GIFT City

The sunset dates for IFSC units in regard to exemptions has been extended to 31 Mar’30. Exemption to capital gains for non-resident or unit of IFSC on transfer of equity shares of a ship leasing domestic company and dividend paid by a ship leasing company in IFSC to a unit of IFSC engaged in ship leasing has been extended. Further, there are benefits given to insurance officers and treasury centres of global companies set up in IFSC. While the measures are multifarious, much more would be needed to make IFSC a leading hub globally. Further, Sovereign Wealth Funds and Pension Funds now enjoy extension of investment date till 31 Mar’30. Certainty of taxation has also been promised for Category I and II AIFs. The insurance sector now has 100% FDI allowance, a move expected to attract more foreign interest.

No compromise on fiscal consolidation as downward trajectory for borrowings put forth

The government has reduced its fiscal deficit target for FY25RE to 4.8% of nominal GDP, with FY26BE target set at 4.4% (better than the trajectory which factored in 4.5%). Accordingly, gross borrowing is projected at Rs. 14.82 trn as per FY26BE, with net borrowing at Rs. 11.54 trn. The increase in gross borrowing reflects higher repayments, as net borrowings are expected to decrease. The FM highlighted that the Union would endeavour to keep fiscal deficit from FY27-FY31 such that the debt is on declining path to attain a debt to GDP level of about 50±1% by 31 Mar’31. This budget seeks to balance fiscal prudence, the practical need for revenue expenditure to stimulate consumption, and the maintenance of capital expenditure.

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