ICICI Securities expects the Union Budget 2026 to deliver positive surprises for lenders and industrial stocks, with a strategic shift toward manufacturing and infrastructure development rather than tax stimulus measures. The domestic brokerage anticipates higher capital expenditure allocations, increased divestment activities, and focused spending on developmental areas.

Manufacturing Takes Center Stage

Analysts Vinod Kakri and Bhavesh Talreja from ICICI Securities indicate that after providing tax stimulus surprises in the previous year, the Budget for FY27 will likely prioritize developmental spending over broad-based tax relief. The focus on domestic manufacturing aligns with the increasingly inward-looking global policy environment and elevated geopolitical risks.

The brokerage expects continued government support for labour-intensive manufacturing sectors, particularly textiles and jewellery, which face pressure from US tariff announcements. Strategic budget allocations through Production Linked Incentive (PLI) schemes will likely target high-value sectors.

Infrastructure Investment and Fiscal Constraints

Despite the manufacturing focus, fiscal constraints and the government's commitment to reducing the debt-to-GDP ratio will influence spending patterns. ICICI Securities projects that capex growth for FY27 may not exceed the nominal GDP growth rate. In 2025, the government allocated ₹11.21 lakh crore for the infrastructure sector, establishing a substantial baseline for continued development.

The brokerage notes that with tax collections slipping in FY26 following various concessions throughout the year, the government has already implemented revenue-shoring measures, including recent excise duty hikes on tobacco products.

Revenue Enhancement Through Divestment

With tax collection trends showing weakness, ICICI Securities anticipates renewed focus on alternative revenue sources. Divestment and asset monetisation are expected to gain prominence as key revenue-generation tools. However, the brokerage sees limited upside in dividend payouts, which have already increased significantly since FY23.

Bond Market and Debt Management

The brokerage highlights the challenging bond market environment, where yields remain elevated at around 6.60% despite RBI rate cuts of 125 basis points to 5.25%. Market expectations of increased borrowing, particularly from state governments planning approximately ₹5.00 trillion in Q4 FY26 borrowings, continue to pressure yields.

ICICI Securities suggests that positive surprises in fiscal management, such as lower-than-expected debt-to-GDP or fiscal deficit-to-GDP ratios (currently budgeted at 4.40% for FY26), could help reduce bond yields and interest rates. Controlled government bond issuance would also minimize crowding out of private borrowers, supporting private sector investment and overall credit growth.

Investment Implications

Based on these Budget expectations, ICICI Securities recommends an overweight stance on lenders and industrial stocks. The anticipated focus on manufacturing, infrastructure development, and credit growth creates favorable conditions for these sectors, while controlled fiscal management could support broader market stability through improved bond market dynamics.

India's foreign investment landscape has reached a significant milestone, with gross FDI rising 19.4% to $51.8 billion in April-September 2025-26. This growth comes as discussions around Union Budget 2026 shift from traditional rate-reduction demands to more strategic concerns about revenue balance and tax certainty. The budget will serve as a crucial test of India's ability to harmonize domestic tax policies with evolving global standards while preserving its investment attractiveness.

Global Tax Standards and Cross-Border Investment Shifts

The international investment framework has undergone substantial changes, particularly affecting traditional FDI routes. Mauritius, which previously contributed nearly 34% of overall FDI to India, experienced a sharp decline in its share following the 2017 treaty amendments and introduction of General Anti-Avoidance Rules (GAAR). These developments reflect India's strategic pivot toward substance-based taxation, aligning with global treaty practices under the Multilateral Instrument (MLI).

The March 2024 Protocol introduced the Principal Purpose Test (PPT), adding further complexity to cross-border arrangements. However, the January 2025 CBDT Circular provided clarity by confirming that grandfathered pre-2017 investments remain outside the PPT's scope. To facilitate the transition from treaty-driven to substance-based investment, Budget 2026 is expected to codify profit attribution rules for Permanent Establishment (PE) and establish objective guidelines for Significant Economic Presence (SEP).

Corporate Law and Tax Code Alignment

The Ministry of Corporate Affairs recently expanded fast-track merger provisions under Section 233 of the Companies Act, 2013, effective September 2025. These provisions now enable unlisted firms and foreign holding companies to reorganize more efficiently. However, the Income-tax Act 2025 currently lacks corresponding provisions for tax neutrality in fast-track demergers, creating a gap that industry expects Budget 2026 to address.

GIFT City Development and Tax Incentives

Positioning GIFT City as a global financial hub requires addressing residual tax frictions, particularly taxation on dividends for non-residents investing through the International Financial Services Centre (IFSC). While Budget 2025 clarified the non-applicability of deemed dividend provisions for listed multinational enterprise (MNE) groups, this benefit remains unavailable to unlisted groups. Extending this clarity would enable unlisted MNEs to utilize IFSC for global cash pooling and treasury operations, enhancing GIFT City's competitiveness with Singapore and Dubai.

Administrative Progress and Dispute Resolution

The tax administration has demonstrated significant progress in dispute resolution during FY 2024-25. Key achievements include:

Despite the 155% increase in appeal disposals representing 1.72 lakh cases, 5.39 lakh appeals remain pending. This backlog continues to create working capital blockages and increase risk premiums for foreign investors, highlighting the need for enhanced appellate capacity.

The record 174 Advance Pricing Agreements (APAs) signed in FY 2024-25, including 65 bilateral APAs, demonstrates strong progress toward providing certainty and reducing cross-border transfer pricing disputes. Budget 2026 is anticipated to further strengthen the APA framework to enhance predictability for MNEs.

Tax Compliance Simplification

The current Tax Deducted at Source (TDS) regime features multiple rates ranging from 0.1% to 30%, creating classification disputes and cash-flow challenges. Industry expectations for Budget 2026 include:

• Consolidation of TDS rates into minimal brackets
• Exemption from TDS on B2B payments already subject to GST
• Streamlined compliance procedures to reduce administrative burden

The transition from the Income-tax Act 1961 to the Income-tax Act 2025 presents both opportunities and challenges. Critical transitional issues requiring clarification include carry-forward of losses, grandfathering of incentives, treatment of ongoing assessments, and reopening timelines. Budget 2026 must provide a comprehensive procedural framework to prevent these transitions from becoming sources of litigation and uncertainty.