As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2026 on February 1st, all eyes are on the government's approach to sustainable consolidation, infrastructure development, taxation, and the burgeoning Artificial Intelligence (AI) sector. The budget arrives at a complex juncture, marked by global trade tensions and the need to balance growth with fiscal prudence. Here's a breakdown of what various stakeholders are expecting.

Sustainable Fiscal Consolidation

The government has successfully reduced its fiscal deficit from 9.2% of GDP in FY21 to an estimated 4.4% in FY26. Expectations are that this trend will continue, with ICRA anticipating the central government capping the fiscal deficit at 4.3% of GDP for FY27. However, the IMF projects overall growth moderating to 6.4% in FY27 and FY28, emphasizing the need for fiscal consolidation to be managed in a way that does not constrain growth. EY India suggests that a further reduction in the fiscal deficit of 0.4% points of GDP may be expected in FY27, achieved through slight reductions in revenue expenditure while maintaining capital expenditure. Emphasis will be on disciplined spending, targeted capital allocation, and encouraging private sector participation.

Infrastructure Push: From Build-Out to Performance

A significant infrastructure push is widely anticipated, with experts expecting a 10-15% increase in government capex to ₹12-12.5 lakh crore. Areas of focus are expected to include railways, logistics, roads and highways, telecom and digital infrastructure, and long-term capex loans to states. A potential ₹25,000 crore fund may be established to revive stalled infrastructure projects. The underlying expectation is a shift from simply expanding physical capacity to improving asset productivity and reducing logistics costs. A new ₹150 lakh crore National Infrastructure Pipeline (NIP) for 2026-32 is also expected to provide long-term visibility to investors and state governments. Focus will be on faster completion of existing projects, lifecycle-based planning, and smarter procurement models.

Taxation: Relief for the Middle Class?

With rising inflation impacting household budgets, many are hoping for income tax relief. Salaried taxpayers are looking for a higher standard deduction, potentially increased to ₹1 lakh to make income up to ₹13 lakh tax-free. There are also expectations for rationalized tax slabs and simplification of TDS rates. Experts are urging the government to address the mismatch where capital gains are still taxed even when income is below the taxable limit. Suggestions include aligning capital gains tax with income tax slabs and introducing inflation-linked exemptions for long-term equity capital gains. Furthermore, the industry is seeking rationalization of GST on vital education inputs and the removal of the 18% GST on textbook paper. A new income-tax bill to simplify and reduce litigation is also expected.

AI: From Skilling to Real-World Deployment

The technology sector is looking for stronger guidance and increased investment in AI development and digital infrastructure. While last year's budget allocated ₹2,000 crore to the IndiaAI Mission and ₹500 crore for a Centre of Excellence in AI, the focus is now on converting these commitments into concrete results. Experts emphasize the need to move beyond broad AI skilling promises and concentrate on employability, infrastructure, and domestic AI capability. Key expectations include increased funding for DPDP enforcement, compute subsidies for startups and researchers, and support for India-specific AI models. There is also a call for stronger collaboration between industry and academia, more experiential learning, and incentives for companies to invest in AI adoption and workforce training.

Other Key Expectations

• Circular Economy: The budget is seen as an opportunity to accelerate a high-circularity ecosystem through GST rationalization on recycled materials and incentives for formal recycling.
• Export Promotion: Expansion of the country's ₹25,060 crore Export Promotion Mission is anticipated, with measures like government-supported collateral guarantees and interest subvention on export credit.
• Housing: Continued focus on housing and infrastructure is expected, with close tracking of allocations for the Pradhan Mantri Awas Yojana (PMAY).
• Digital Compliance: Strengthening of technology-driven tax compliance is expected, with simplified return filing and faster refund mechanisms.

Overall, Budget 2026 is expected to be a carefully balanced budget that prioritizes sustainable growth, infrastructure development, tax simplification, and a strategic push for AI, while maintaining fiscal discipline and responding to global economic challenges.