Pankaj Pandey, head of research at ICICI Securities, expects Budget 2026 to largely continue the government's focus on manufacturing, capital expenditure, and fiscal prudence. Despite anticipating modest overall capex growth given the high existing base, specific sectors like defence and railways are positioned for significant allocation increases.

Budget 2026 Capital Expenditure Outlook

The expert anticipates modest growth in capital expenditure, considering the substantial existing base and historical performance:

Despite the overall modest expectations, defence and railways are expected to receive prioritised allocations. Railways specifically may see increased funding for new high-speed corridors, Vande Bharat trains, and Kavaach programmes.

Defence Spending Projections

The defence sector is positioned for substantial budget increases, driven by the government's modernisation focus:

The Defence Ministry targets achieving a defence capital budget-to-GDP ratio of 0.80% over the next five years, representing a substantial increase from the current 0.50% of GDP.

Sectoral Focus Areas

Several sectors are expected to receive targeted support in Budget 2026:

Real Estate: Expected to receive support due to its 7-8% GDP contribution, correlation with allied industries like cement and steel, and status as the second-largest employer after agriculture. Affordable housing may see relief measures including expanded definitions for value and unit sizes.

Textiles: The industry, employing nearly 45 million people, faces pressure from high US tariffs on Indian exports. Expected policy measures include relief schemes, tax concessions for new units, and potential permanent removal of the 11% cotton import duty.

Mining: Increased budgetary allocation expected for rare earth minerals mining and processing.

Consumption and Tax Policy

Pandey sees limited scope for new consumption acceleration measures, noting the government has already engaged in front-loading through reduced personal income tax rates and rationalised GST rates. With constrained fiscal room, no major new consumption measures are expected, though minor tweaks to personal income taxation remain possible to shift individuals from old to new tax regimes.

Q3 Earnings Assessment

Early Q3 results indicate stabilisation trends across key sectors:

IT Sector: Shows early signs of stabilisation despite continued headwinds from US macro uncertainty and geopolitical tensions. Select growth pockets emerged across verticals and geographies, with improved deal activity and larger-deal TCV wins indicating better demand visibility.

Banking Sector: Credit growth has improved to 10-12%, driven by retail and MSME segment traction with strong competitive intensity in home and auto loans. Asset quality remains resilient across segments, with stress in MFI and unsecured retail largely bottoming out.

Investment Strategy Recommendations

Amid increased geopolitical risks and market volatility, with headline indices down 4% since early 2026, Pandey recommends focusing on companies with healthy capital efficiency (RoE and RoCE above 15%), strong balance sheets (debt-to-equity below 1), and growth longevity. For medium-term investment, BFSI, capital goods, IT, and real estate sectors are positioned at the top of the recommendation list, with sector rotation expected as the core theme.

A detailed economic analysis emphasizes the strategic importance of maintaining public capital expenditure focus in India's upcoming Budget 2026-27, highlighting infrastructure investment's proven multiplier effects and structural economic benefits.

Infrastructure Investment Delivers Strong Multiplier Effects

The analysis reveals that infrastructure spending generates significantly higher economic returns compared to consumption expenditure. While consumption spending typically delivers one-time benefits, infrastructure investment creates sustained economic impact through job creation, cost reduction, and productivity enhancement.

This multiplier effect stems from infrastructure's dual impact: immediate demand creation across multiple sectors during construction, followed by ongoing productivity improvements from completed assets.

Capital Expenditure Growth Shows Substantial Expansion

Central government capital expenditure has demonstrated remarkable growth trajectory, reflecting the administration's commitment to infrastructure-led development.

The substantial increase in capital allocation demonstrates the government's strategic positioning of infrastructure investment as the primary instrument for achieving ambitious economic targets.

Logistics Efficiency Improvements Exceed Expectations

Recent research has revealed significant improvements in India's logistics performance, contradicting earlier pessimistic assessments. A comprehensive study commissioned by the Department for Promotion of Industry and Internal Trade and conducted by the National Council of Applied Economic Research has provided updated logistics cost data.

These improvements reflect tangible benefits from sustained investment in highways, rail freight corridors, port modernization, and multimodal logistics infrastructure. The enhanced efficiency directly supports manufacturing and export competitiveness through reduced operational costs.

Private Investment Catalyzed by Public Infrastructure

Public infrastructure investment has demonstrated its effectiveness in stimulating private capital formation rather than crowding it out. Improved connectivity and reduced project risks have enhanced returns across multiple sectors:

• Manufacturing facilities benefit from better transport connectivity
• Logistics operations gain from improved rail and highway networks
• Renewable energy projects leverage enhanced power transmission infrastructure
• Data centers capitalize on improved digital backbone
• Urban services expand with better infrastructure foundation

This catalytic effect positions public capital expenditure as a strategic tool for anchoring long-term investment cycles and shaping positive market expectations.

Strategic Recommendations for Budget 2026-27

The analysis identifies three critical areas for optimizing infrastructure investment effectiveness in the upcoming budget:

High-Multiplier Focus Areas:

• Logistics infrastructure development
• Urban infrastructure expansion
• Power transmission networks
• Renewable energy integration
• Digital infrastructure backbone

Private Capital Integration:

• Enhanced public-private partnerships
• Strategic asset monetization programs
• Blended finance mechanisms

Execution Quality Improvements:

• Streamlined approval processes
• Milestone-linked funding mechanisms
• Enhanced monitoring systems
• Faster ground-level asset delivery

The expert analysis concludes that capital expenditure represents more than budgetary allocation—it constitutes a comprehensive economic strategy. As global growth faces uncertainty and domestic pressures mount, maintaining infrastructure investment focus provides stable economic anchoring while supporting long-term growth objectives. The approach signals policy continuity to markets and investors planning substantial capital commitments, reinforcing India's commitment to sustainable, inclusive economic development.