As Finance Minister Nirmala Sitharaman prepares to present the Union Budget for 2026-27, market participants are closely monitoring how India plans to navigate the delicate balance between supporting economic growth and maintaining fiscal discipline. According to Axis Securities, the upcoming budget will likely prioritize sustaining growth momentum without compromising medium-term fiscal consolidation objectives, particularly given the current environment of global uncertainties and volatile capital flows.

Growth Outlook and Economic Fundamentals

India's economic performance continues to demonstrate resilience, with real GDP growth estimated at around 7.40% in FY26. This growth trajectory has been supported by sustained government capital expenditure, robust services exports, and gradual improvement in private investment sentiment. However, Axis Securities has highlighted concerns regarding moderation in consumption demand and persistent global risks, which necessitate a carefully calibrated fiscal strategy for the upcoming budget period.

Capital Expenditure Strategy and Sectoral Focus

Axis Securities expects capital expenditure to remain the cornerstone of the government's growth strategy in Budget 2026-27. The brokerage anticipates allocations in the range of ₹12-13 trillion, representing a 10-15% year-on-year increase from previous levels.

For global investors, sustained public capital expenditure is viewed as critical for encouraging private investment participation and supporting medium-term earnings visibility, particularly within infrastructure-linked sectors.

Fiscal Consolidation Targets

Axis Securities expects the government to maintain its commitment to fiscal consolidation, targeting a fiscal deficit of approximately 4.20-4.40% of GDP for FY27. Achieving this target range would demonstrate strong policy credibility to both domestic and international investors, reinforcing India's position as a stable investment destination amid global economic volatility.

Consumption Support and Rural Development

The brokerage has identified balancing capital expenditure-led growth with consumption support as one of the key challenges for Budget 2026-27. With urban consumption showing signs of moderation and rural demand remaining uneven, the government may implement support measures through several channels:

• Rural infrastructure development programs
• Enhanced agriculture support mechanisms
• Employment generation and skilling initiatives
• Targeted welfare spending programs

Revenue Generation and Fiscal Buffers

Axis Securities expects disinvestment and asset monetization to play important roles in supporting non-tax revenues, with potential targets ranging from ₹50,000-70,000 crore. While historical execution has faced challenges, the brokerage suggests that a clearer and time-bound roadmap could receive positive market reception.

The brokerage also highlighted the potential role of higher-than-budgeted dividend transfers from the Reserve Bank of India as a key fiscal buffer, which could help offset revenue pressures and limit market borrowings without compromising growth expenditure allocations.

Structural Reforms and Market Expectations

Beyond headline fiscal numbers, Axis Securities indicated that markets will closely monitor signals regarding structural reforms across multiple areas. These include ease-of-doing-business improvements, labor and logistics efficiency enhancements, digital public infrastructure development, and legal and regulatory simplification measures. Such reforms are considered essential for boosting productivity, attracting long-term foreign capital, and sustaining India's investment-led growth trajectory.

Tax policy experts have presented comprehensive recommendations for Budget 2026 to enhance India's mergers and acquisitions environment, particularly with the Income-tax Act, 2025 scheduled for implementation from April 1, 2026. The suggestions aim to address existing regulatory gaps and improve the ease of doing business for M&A transactions.

Fast-Track Demerger Tax Neutrality

A primary recommendation involves extending tax neutrality to fast-track demergers under Section 233 of the Companies Act, 2013. Currently, the Income-tax Act, 2025 provides tax neutrality only to NCLT-approved demergers under Sections 230 to 232, excluding fast-track demergers that enable small or closely held companies to undertake demergers without court approval.

The finance ministry's rationale for excluding fast-track demergers centers on concerns about potential valuation manipulation without court oversight. However, experts argue this approach contradicts the ease of doing business agenda, forcing genuine taxpayers to choose between transaction efficiency and tax benefits.

Contingent Consideration Clarity

Experts emphasize the need for clear taxation guidelines on earn-out, profit-linked, or contingent consideration arrangements that have become increasingly common in M&A transactions. These arrangements tie part of the sale consideration to achieving specific profitability or financial milestones.

The current legal framework lacks clarity on:

• Taxability of contingent payments
• Timing of taxation for such arrangements
• Treatment of milestone-based considerations

Foreign Company Merger Anomalies

The recommendations address existing inconsistencies in foreign company merger taxation. While foreign companies enjoy capital gains tax exemptions on direct or indirect share transfers during mergers with other foreign companies, shareholders of the amalgamating company face potential capital gains liability on share swaps.

This creates an anomaly compared to domestic mergers, which provide exemptions at both company and shareholder levels.

Capital Gains Tax Rate Concerns

The recent capital gains tax regime rationalization introduced higher long-term capital gains tax rates, which experts suggest adversely impacts investor returns and exit efficiency. The increased rates potentially drive investors toward jurisdictions with more favorable tax regimes.

Key concerns include:

• Reduced post-tax returns for investors
• Decreased competitiveness with other investment destinations
• Impact on foreign capital attraction

Experts recommend reducing capital gains tax rates, suggesting restoration of the earlier 10.00% rate to improve India's competitive position in attracting foreign investment.

Strategic Implementation Timeline

With the Income-tax Act, 2025 set for April 1, 2026 implementation, Budget 2026 represents the final opportunity to incorporate these amendments before the new framework takes effect. The recommendations aim to position India as a preferred destination for cross-border M&A activities while maintaining regulatory integrity and supporting corporate growth objectives.