The Union Budget 2026, presented by Finance Minister Nirmala Sitharaman on February 1st, arrives at a crucial juncture as India strives towards its "Viksit Bharat" vision. The budget seeks to balance fiscal prudence with the need for sustained growth, addressing both short-term market sentiments and long-term economic goals.

Fiscal Prudence and Growth Projections

The Economic Survey 2026 projects a healthy growth rate of 7.4% for FY26 and between 6.8% and 7.2% for FY27, supported by regulatory reforms and a strong macroeconomic foundation. The government estimates the fiscal deficit to be 4.4% of GDP for FY26 and aims to reduce it to 4.3% in FY27. This commitment to fiscal consolidation is reflected in the declining debt-to-GDP ratio, projected at 55.6% in BE 2026-27 compared to 56.1% in RE 2025-26. A declining debt-to-GDP ratio will free up resources for priority sector expenditure by reducing the outgo on interest payments.

Infrastructure Push and Capital Expenditure

A key highlight of the budget is the significant increase in public capital expenditure, proposed to be ₹12.2 lakh crore for FY27. This amounts to 4.4% of GDP, the highest ever, signaling the government's commitment to infrastructure development as a driver of economic growth. The budget includes provisions for new dedicated freight corridors, high-speed rail corridors, and the development of waterways, all aimed at improving connectivity and reducing logistics costs. Furthermore, the government is focused on developing infrastructure in Tier II and Tier III cities, positioning them as emerging growth centers.

Balancing Act: 8th Pay Commission and Resource Mobilization

One of the significant challenges for Budget 2026 is balancing fiscal discipline with the expenditure pressures arising from the 8th Pay Commission, which will put higher salaries in the hands of over 3 crore government employees. Nilesh Shah of Kotak Mahindra AMC suggests monetizing idle household gold and silver as a potential solution. Defreezing these assets and bringing them into the financial system can raise government resources, support consumption and investment, and help meet fiscal targets without destabilizing the macro framework.

Market Sentiments and Taxation

The budget proposes an increase in the Securities Transaction Tax (STT) on futures and options. Nilesh Shah, founder of Envision Capital, believes this move is likely to dampen market sentiment in the near term, with concerns emerging around trading volumes due to reduced liquidity. The stock market reflected this sentiment, with shares of brokerage-related companies experiencing a downturn.

Sector-Specific Highlights and Future Outlook

Despite the concerns surrounding STT, the budget contains several positives for sectors such as textiles, semiconductors, and rare earth minerals. The continued focus on infrastructure development and incentives for manufacturing are expected to provide long-term tailwinds for the economy. The government is also promoting container manufacturing with a budgetary allocation of ₹10,000 crore over five years. Finance Minister Nirmala Sitharaman reiterated the government's commitment to developing infrastructure in Tier II and Tier III cities with populations above five lakh, positioning them as emerging growth centres.

Overall, Budget 2026 demonstrates a commitment to sustainable and inclusive growth, with efforts to unlock India's economic potential. While some measures may face short-term market headwinds, the budget's focus on infrastructure, fiscal prudence, and long-term reforms aims to strengthen India's position on the global stage.