As the Finance Minister prepares to present the Union Budget for FY2026-27, India finds itself at a crucial juncture amid global uncertainties and uneven domestic growth patterns. Markets are seeking clarity and continuity rather than headline-grabbing fiscal stimulus, with expectations centered on sustaining growth without compromising fiscal credibility.

Economic Backdrop and Growth Outlook

India's economic fundamentals remain relatively strong despite global headwinds. The country's real GDP growth is estimated at around 7-7.5% for FY26, supported by public capital expenditure, resilient services exports, and a gradually improving private investment cycle. Inflation has moderated meaningfully over the past year, providing policymakers with greater flexibility for budget planning.

Fiscal Strategy: Consolidation Pause

After several years of fiscal tightening, FY27 is likely to mark the end of fiscal drag. The government is expected to retain the fiscal deficit at around 4.4% of GDP, similar to FY26, rather than pursuing further consolidation. This pause would allow the economy to absorb benefits from past monetary easing and earlier tax rationalisation.

Gross tax revenues are projected to grow in the high single-digit range, aided by a low base and gradual recovery in nominal GDP growth. While FY26 revenues faced pressure from tax cuts and softer demand, FY27 should witness improved buoyancy, though upside may be limited by cess rationalisation and absence of new tax hikes.

Capital Expenditure and Credit Growth Focus

Public capital expenditure remains central to India's growth strategy. While headline capex growth may stay in the low-to-mid teens, significant opportunities exist through PSU balance sheets and extra-budgetary resources. The credit channel presents particular promise, with growth accelerating across corporate, retail, and infrastructure segments after a prolonged deleveraging period.

Key Credit Support Measures Expected:

• Targeted credit guarantees for specific sectors
• Interest subvention for export-facing industries
• Deeper support for private credit markets
• Measures to amplify monetary easing impact

Manufacturing and Strategic Priorities

The Budget is expected to reinforce India's structural priorities through extended Production Linked Incentive (PLI) framework support. Incentives may be refined or expanded for emerging sectors including AI hardware, electronics, data centres, robotics, defence manufacturing, and semiconductors.

External Balance and Currency Management

India's balance of payments has faced pressure from a wider trade deficit, volatile portfolio flows, and higher energy imports. The RBI has maintained a stabilising approach, using reserves judiciously to smooth volatility rather than defending specific currency levels. This strategy preserves external confidence while allowing the rupee to function as a shock absorber.

Tax Policy and Market Sensitivity

Following significant income-tax rationalisation in 2025, no major changes to personal income tax rates are anticipated. The focus remains on simplification and compliance efficiency. However, markets will closely monitor any potential changes to capital gains taxation, as even marginal adverse adjustments could impact investor sentiment during the current recovery phase.

Market Expectations and Earnings Outlook

From a market perspective, the Budget is likely to provide incremental support rather than transformative changes. Early cyclical recovery signs are visible, with earnings growth expectations remaining healthy at around 19-20% for mid- and small-cap companies, compared to 11-13% for large caps. These projections appear achievable provided top-line growth improves and credit flows remain supportive.

Ultimately, Budget 2026-27 represents a shift toward signalling consistency and stability rather than stimulus-driven growth. A steady fiscal stance, credible external management, and targeted investment support could collectively strengthen growth momentum in an increasingly volatile global environment.

Markets are positioned for a potential multi-year bull run if the upcoming Union Budget 2026 strikes the right balance between infrastructure spending and consumption support, according to Himani Shah, Co-Fund Manager at Alchemy Capital Management. She emphasizes that investors are looking for a 'pragmatic' budget rather than a 'populist' one, with the current market correction potentially setting the stage for sustained growth.

Domestic Fundamentals Remain Strong Despite Global Headwinds

Shah highlights that India's domestic fundamentals remain remarkably resilient despite global uncertainties. The country is witnessing a structural revival in manufacturing, with recent data indicating performance at a 12-month high and an 8% growth rate. Strategic cuts in Income Tax and GST have provided significant liquidity injection for the middle class, successfully driving consumer spending.

Market Outlook and Growth Expectations

From a strategic standpoint, Shah anticipates mid-to-high single-digit market growth over the next 12 months. While expecting near-term underperformance as markets digest global volatility, she remains optimistic about fundamental indicators. High-frequency data supports this conviction, particularly the resurgence in auto sales and retail momentum.

However, she notes that GST collections growing at only 6% in December 2025 remain a primary variable to monitor. An uptick in GST collections would support the conservative floor of mid-to-high single-digit index returns, potentially representing high-quality growth underpinned by genuine earnings expansion.

Infrastructure Investment Remains Strategic Priority

Shah emphasizes that maintaining the Rs 11 trillion capex momentum is both an economic goal and strategic necessity. In an era of fragmenting global trade and rising geopolitical tensions, India cannot afford to reduce capital expenditure focus. The government must continue funding high-impact infrastructure including:

• Digital grids
• Electronics Manufacturing Services (EMS)
• Renewable energy ecosystems

This infrastructure commitment is crucial for capturing the 'China+1' opportunity, leveraging India's vast, young labor force to serve as a manufacturing alternative.

Budget 2026 Sector Focus Areas

Shah expects three sectors to be in the spotlight during Union Budget 2026:

Earnings Outlook and Risk Factors

While Q3FY26 results have shown substantial growth and revival, Shah cannot entirely rule out earnings volatility. The sustainability of this trend into Q4FY26 and beyond depends on the government's ability to maintain spending levels. If fiscal constraints force a pullback on the Rs 11 trillion capex plan, there may be slight cooling in industrial and infrastructure-linked earnings.

AI Impact on Employment and Investment Strategy

Regarding AI adoption's impact on employment, Shah views this as workforce 'displacement' rather than total hiring pause. She notes a historical inversion where white-collar cognitive roles face deflationary pressures from automation, while the 'real economy' sectors including manufacturing and physical infrastructure remain labor-hungry and resilient.

This creates investment opportunities in companies utilizing AI to expand operating margins without linearly increasing headcount, boosting Earnings Per Share. The strategy pivots toward 'physical world' sectors such as industrials and capital goods, where human expertise remains irreplaceable.