India's economic performance has exceeded expectations in fiscal 2026, demonstrating remarkable resilience amid global uncertainties. The favorable growth-inflation mix has been supported by accommodative monetary and fiscal policies, robust corporate balance sheets, and beneficial external factors including above-normal monsoon conditions and subdued crude oil prices. Trade performance has been cushioned through strategic measures including front-loading of exports, exemptions for electronics and pharmaceuticals sectors, and a high proportion of service exports that remain less exposed to potential tariff impacts.

Economic Growth Projections

The economic outlook presents a mixed picture for the coming fiscal year. Real GDP growth is projected to moderate while nominal growth is expected to accelerate as inflation conditions normalize.

This shift in growth dynamics is expected to support both tax collections and corporate revenues, providing a foundation for sustained economic performance.

Fiscal Policy Framework

The central government has maintained fiscal discipline over the past decade, with exceptions only during pandemic-related emergencies. This track record of fiscal rectitude is expected to continue, with the upcoming Union Budget likely to maintain the fiscal deficit target at approximately 4.4% of GDP for FY27, consistent with the current year's objective.

Despite this fiscal discipline, government bond yields have remained elevated, attributed primarily to states borrowing beyond their budgeted allocations. This situation underscores the critical need for fiscal discipline across all tiers of government and highlights the importance of reviving the Public Sector Borrowing Requirement (PSBR) as a comprehensive measure of the nation's fiscal health.

Investment Landscape and Sectoral Focus

Capital deepening remains essential for elevating India's growth trajectory. While government and household investments have driven post-pandemic growth, the overall investment-to-GDP ratio remains around 30.00%. Private investments are showing encouraging signs of recovery, with the momentum expected to allow the private sector to gradually assume the capital expenditure leadership role from the government.

The nature of investment is undergoing significant transformation. Emerging sectors are gaining prominence in the industrial capital expenditure landscape:

Strategic Sector Development

The Production-Linked Incentive (PLI) scheme and emerging sectors including electric vehicles, semiconductors, electronics, photovoltaic cells, and data centres are expected to drive this transformation. Recent policy developments include the opening of the insurance sector to 100.00% foreign direct investment, alongside ongoing reforms in labor laws and regulatory structures aimed at reducing compliance burdens.

Incentive structures with sunset clauses have proven effective in promoting investments in segments such as electronics under the PLI framework. The approach emphasizes prioritizing scale initially before focusing on higher value addition in specialized areas like advanced carbon composite batteries, where investment-to-incentive ratios are substantial.

Long-term Vision

The government's ambitious Viksit Bharat target of achieving developed economy status by 2047 provides the overarching framework for policy decisions. Each budget serves as a stepping stone toward this long-term objective, requiring sustained focus on domestic growth drivers while maintaining macroeconomic stability amid global uncertainties.

India's transition to the new tax regime is gaining momentum, with filing data showing significant adoption among taxpayers. As the country prepares to implement the Income Tax Act 2025 from April 1, 2026, Budget 2026 presents a crucial opportunity to establish the foundations for a simplified, responsive tax ecosystem.

Current Tax Regime Adoption Shows Strong Progress

The shift towards India's new tax regime is well underway, supported by compelling filing statistics. The data reveals substantial taxpayer adoption and expanding compliance base.

This adoption rate demonstrates that Budget 2025's approach of nudging taxpayers towards the new regime through rationalized rates and fewer deductions has been effective.

Three Strategic Priorities for Budget 2026

Budget 2026 should concentrate on three key priorities to support the successful rollout of the Income Tax Act 2025. These focus areas address the operational challenges of implementing a simplified tax framework while maintaining compliance effectiveness.

Improving Ease of Compliance

The first priority involves providing greater clarity and addressing inequities where needed. This includes simplifying complex compliance requirements and ensuring transparent guidelines for taxpayers navigating the new framework.

Strengthening Digital Infrastructure

The second focus area encompasses enhancing technological capabilities through:

• Pre-filled returns for simplified filing processes
• Intuitive dashboards for better taxpayer experience
• AI-enabled assistance to reduce errors and simplify filing procedures

These digital enhancements aim to reduce compliance burden while improving accuracy and efficiency.

Streamlining Dispute Resolution

The third priority addresses the need for faster, more predictable dispute resolution through faceless processes and time-bound mechanisms. This approach aligns with the "trust first, scrutinize later" philosophy while ensuring timely resolution of taxpayer concerns.

Key Areas Requiring Attention

Several specific areas need consideration to enhance the new tax framework's effectiveness. These include addressing long-standing concerns around cryptocurrency taxation, employee stock options, and refund processing delays.

The current approach to virtual digital assets involves a flat 30% tax rate with limited deduction allowances, contrasting with capital gains frameworks used in jurisdictions like the US and UK. Greater clarity in this area could help retain trading activity within India's tax jurisdiction.

Employee stock options present another challenge, with tax payable at allotment rather than realization. While eligible startups receive deferred taxation benefits, extending similar relief to other employees merits consideration for broader equity.

Building a People-Centric Tax Ecosystem

The success of the Income Tax Act 2025 will depend on creating a tax ecosystem characterized by predictable rules, timely refunds, clear guidance, and efficient appeals processes. Faster refund processing through technology, coupled with real-time tracking dashboards, would strengthen taxpayer trust in the system.

Dispute resolution remains a critical area needing attention, with numerous cases pending at appellate levels. Taxpayer-friendly reforms, including prioritization frameworks and wider use of faceless hearings, can support faster and more predictable resolution processes.

Budget 2026 represents an opportunity to establish India's tax system as simple, responsive, and people-centric, focusing on operational excellence rather than rate adjustments to ensure the new law's successful implementation.