Nuvama Institutional Equities expects Budget 2026, set to be unveiled by Finance Minister Nirmala Sitharaman on February 1, 2026, to maintain a neutral stance from the market's perspective. The brokerage anticipates the FY27 budget will provide modest growth support without significantly disrupting the ongoing earnings downgrades cycle.

According to Nuvama's latest report, the key risk to earnings for FY27 will be margin mean reversion rather than top-line growth challenges. The budget is not expected to significantly favour any specific sector, prompting the brokerage to maintain its defensive investment approach.

Sector Preferences and Outlook

Nuvama's sectoral strategy reflects a cautious yet selective approach across different market segments.

Defence Sector Expectations

The defence sector presents significant growth potential according to Nuvama's analysis. The brokerage projects defence capital expenditure to increase by approximately 8% year-over-year, driven by ongoing modernization efforts and new reforms.

The brokerage emphasizes that success in defence investments will depend on selecting companies demonstrating quicker execution, greater localisation, and better cash conversion rather than merely focusing on order book growth. The anticipated budget increase is expected to accelerate the transition towards execution-driven earnings.

Agriculture and Infrastructure Allocations

For agriculture, Nuvama indicates the government intends to allocate approximately ₹1.5 trillion to the agriculture ministry to sustain PM KISAN and insurance initiatives. Due to crop damage from unpredictable weather patterns, the brokerage anticipates increased allocation for crop insurance, though this is expected to have neutral sector impact.

Railway capital expenditures are expected to see increased budget allocation after three years of relatively subdued growth. The focus will be on enhancing capacity, introducing new rolling stock, and undertaking safety projects. The overarching policy goal remains reducing logistics expenses, as India's logistics costs still exceed the 6-7% level typical of developed nations.

Power Sector Developments

Nuvama anticipates the government will provide robust insights to promote base load servicing for power demand and encourage broader private sector involvement through incentives. Power transmission and distribution stocks are expected to attract attention, along with stocks driven by private capital expenditure following favourable comments on Production Linked Incentive (PLI) scheme introduction.

India's Union Budget 2026 arrives at a critical juncture, facing economic pressures that demand strategic fiscal responses rather than incremental adjustments. The country enters this budget cycle amid slowing global trade, rising geopolitical assertiveness, and a domestic economy that has largely exhausted the benefits of gradual reform measures.

Global Economic Transformation Demands New Approach

The global economic landscape has fundamentally shifted from the multilateral trade framework that previously governed international commerce. Tariffs have returned as instruments of power, industrial policy has shed its stigma, and strategic autonomy has moved beyond rhetoric. Countries that once advocated market purity now openly use fiscal and regulatory tools to protect domestic capacity.

India has experienced this transformation directly through external tariff shocks and trade pressures that exposed the dependency of its manufacturing ecosystem on policy protection rather than global scale and competitiveness. However, these same pressures have accelerated regulatory corrections, including easing non-tariff barriers and rethinking trade posture.

Private Investment Stagnation Signals Deeper Issues

Private capital expenditure remains a critical indicator of underlying economic challenges, staying largely flat despite favorable conditions:

This stagnation occurs despite sustained public capital expenditure and stable macroeconomic conditions, indicating that businesses with balance sheet strength continue delaying long-term commitments due to concerns about confidence, policy certainty, and scaling costs in the current environment.

Manufacturing Competitiveness and Administrative Challenges

India's manufacturing constraints extend beyond capital scarcity to encompass compliance density, policy overlap, and execution risk. The ease of doing business has become more performative than substantive, with rankings and ceremonies providing reassurance while businesses continue navigating daily challenges including inspections, compliance ambiguity, and discretionary administrative power.

Entrepreneurs across sectors report that current constraints stem not from lack of ambition or capital, but from an administrative culture that prioritizes optics over systematic cleanup of regulatory processes.

Strategic Budget Priorities for Economic Transformation

The upcoming budget must address several critical areas to achieve sustained economic growth:

Direct Tax Reform and Policy Certainty

• Implementation of long-deferred direct tax reforms
• Establishment of predictable taxation frameworks
• Reduction of tax litigation
• Simplification of tax codes to restore investment confidence

MSME Sector Restructuring

The Micro, Small and Medium Enterprises sector illustrates the tension between political protection and economic capability. Currently politically protected yet economically burdened, MSMEs are expected to generate jobs, exports, and innovation without structural enablement.

Capital Expenditure and Strategic Allocation

Capital expenditure must move decisively toward sectors carrying both economic and strategic weight, requiring fiscal commitment that is patient, layered, and outcome-oriented. The budget should discontinue protection that insulates inefficiency, incentives encouraging fragmentation, and compliance regimes treating scale with suspicion.

Strategic budgeting requires accepting trade-offs openly, with resources directed toward future capacity that may not immediately translate into visible political gains. However, postponing these investments only increases their eventual cost.

Economic Growth and Social Legitimacy

India faces the challenge of sustaining 9-10% real growth over the next two decades while ensuring expansion benefits broader society segments. Economic growth has increasingly become a macro abstraction for large population sections, with incomes under pressure, fragile employment stability, and varying public service quality.

When growth fails to translate into lived improvement, credibility weakens regardless of headline numbers. The budget must address this gap between statistical success and socio-economic legitimacy to maintain long-term economic momentum.