India Inc prepares for Budget 2026 as Finance Minister Nirmala Sitharaman is set to present fiscal interventions and policy announcements in Parliament on February 1, 2026. Market experts are calling for efficient government capex, reduced interest costs, and enhanced deregulation across various sectors.

Environmental Concerns Impact Foreign Investment

Ajay Srivastava, MD of Dimensions Consulting, highlighted India's primary challenge in an exclusive interaction with NDTV Profit on January 7, 2026. According to Srivastava, the efficiency of government spending, including capex, remains the country's main concern for 2026.

The market veteran warned that foreign capital inflows to India may stay muted due to the country's environmental challenges. "When we talk of FIIs, FDI coming in, let's understand how the investments enter because environmentally, we have a problem," Srivastava stated, referring to deteriorating air quality across metropolitan cities like Delhi and Mumbai.

Quality of Life Concerns Deter Foreign Investment

Srivastava emphasized how environmental degradation affects India's investment attractiveness. The rising levels of AQI and pollution have made daily life difficult across major cities, with quality of life drastically declining due to increasing cases of respiratory diseases, allergies, and reduced immunity levels across all age groups.

"How do you convince a foreigner to invest and live in this country if this is what we present?" the expert questioned. He stressed that overseas companies express concerns about bringing personnel to India due to existing health hazards.

The market expert seeks more efficient government capex from Budget 2026 that is "accountable and in-line with strengthening the living standard of this country." He argued that economic prosperity becomes meaningless without basic health and environmental security.

Interest Costs and Deregulation Priorities

Srivastava identified interest costs as the biggest component of India's budget and a major factor constraining growth. The current interest cost structure limits Indian corporates' ability to produce globally competitive goods.

With Budget 2026, the Centre is expected to deepen its deregulation push across sectors. Srivastava views deregulation through two key aspects:

• Improving performance of Public Sector Undertakings (PSUs)
• Enhancing ease of doing business in the country

The expert highlighted that with state governments borrowing at 7.70%, corporate borrowing costs remain prohibitively high, questioning how businesses can remain competitive under such conditions.

Path Forward for Economic Growth

Srivastava emphasized that the government must focus on capital retention and preventing money outflows from the country. "You got to get capital and get people to stop taking money out of this country," he stated, identifying this as the real challenge for India in 2026.

The expert's recommendations for Budget 2026 center on three critical areas:

• Efficiency of government spending and environmental crisis resolution
• Better city infrastructure development
• Reduced interest costs to enhance corporate competitiveness

According to Srivastava, addressing these fundamental issues is essential for sustaining foreign investment flows and maintaining India's economic growth trajectory in the coming fiscal year.

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.