The Union Budget 2026 remains a pivotal event for India's stock market trajectory, despite relatively muted public discourse around fiscal policy. Government spending has emerged as the primary driver behind the sustained bull run witnessed over the past 12 years, making budgetary allocations crucial for market participants and investors.

Government Spending as Market Catalyst

The significance of the Union Budget extends beyond traditional fiscal policy, serving as a roadmap for government expenditure patterns that directly influence market sentiment. Historical data demonstrates that government spending initiatives have consistently provided the foundation for market growth, creating a direct correlation between budgetary announcements and stock market performance.

Fiscal Deficit: The Determining Factor

The fiscal deficit stands as the single most important metric that determines the government's spending capacity and, consequently, its ability to stimulate economic growth. This financial parameter represents the gap between government expenditure and revenue, indicating how much the government needs to borrow to fund its operations and development programs.

The relationship between fiscal deficit and market performance has become increasingly evident, as higher deficit levels typically translate to increased government spending, which in turn stimulates various sectors of the economy. This spending creates a multiplier effect, benefiting infrastructure, manufacturing, and service sectors.

Market Expectations for 2026

Financial markets are closely monitoring the upcoming budget presentation, as it will provide clarity on the government's fiscal strategy for the year ahead. The finance minister's approach to balancing fiscal responsibility with growth-oriented spending will likely determine market sentiment and investment flows throughout 2026.

Investors and market analysts recognize that while public attention toward budget discussions may appear limited, the document's impact on market dynamics remains substantial. The budget's influence on sectoral allocations, infrastructure spending, and overall economic policy continues to shape investment decisions across various market segments.

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.