The 2026-27 Budget: A Tightrope Walk from Public Spending to Private Power

The upcoming Union Budget for 2026-27 will not merely be an exercise in accounting; it is a critical document marking India’s transition to its next phase of economic growth. For the past few years, the economy has been anchored by the government’s sustained and aggressive public capital expenditure (Capex) drive, a strategy that has successfully kept the growth engine running. The challenge now is far more nuanced: to successfully pass the baton to the private sector and sustain a robust consumption story, all while navigating a stormy global environment. This budget, therefore, can be defined by a precise and surgical focus on structural reforms and execution efficiency.

Domestic Growth & Investment Challenges

The primary macroeconomic challenge for the upcoming budget is shifting the growth engine from state-led public investment to sustainable, private-sector-led growth.

Reviving Private Capex

Challenge: Private capital expenditure (Capex) remains sluggish because corporations are hesitant to invest in new capacity due to uncertainty and existing profitability strain. The high-multiplier effect of the government's sustained Capex push can be fully capitalized by crowding in private investment.  The government's core strategy can move beyond spending and focus on policy predictability and non-financial reforms. Budgetary measures can encourage long term Private Sector Investment. Specific actions could include:

Expediting Clearances: Dedicating budgetary funds to fast-track digital clearances (e.g., land, environmental, licensing) for large-scale projects announced in the preceding year.

Infrastructure Quality: Focusing not just on the volume of public Capex, but on the quality and timely completion of key logistics links (ports, dedicated freight corridors), which reduces the operating cost of future private projects. Economists have stressed creating predictable conditions for businesses to invest.

Addressing Corporate Profitability

Challenge: Corporate sector profitability is under strain, making it difficult for companies to self-fund expansion and attract equity. The budget can find ways to reduce operational costs without sacrificing direct or indirect tax revenue targets. The profitability strain often stems from high energy, logistics, and compliance costs. Since a reduction in the current low corporate tax rate is unlikely, the focus shifts to relief through the supply side and regulatory easing:

Compliance Burden Reduction: The budget could allocate resources to a mission to simplify Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) rules, and clear the backlog of income-tax appeals, as these issues create significant working capital blockages and costs.

Incentives for Efficiency: Utilizing the existing low corporate tax structure but adding investment-linked deductions or accelerated depreciation for specific high-tech machinery or green investments. This supports profitability for new, productive investment without offering blanket relief.

Sustaining Consumption Momentum

Challenge: The recent GST rate reductions provided a boost to private consumption, but this momentum can be sustained. Consumption accounts for over 56% of India's GDP, making it the bedrock of growth. To maintain the consumption engine, the budget can directly address household disposable income. Since the previous budget already increased the income tax exemption limit (e.g., up to ₹12 lakh in the new tax regime, as per previous budget discussions), further massive tax cuts are fiscally constrained. The focus shifts to:

Targeted Direct Transfers: Scaling up welfare schemes (like PM-KISAN, expanded PDS) that put money directly into the hands of the lower-income and rural segments, who have a higher marginal propensity to consume.

Housing & Infrastructure Incentives: Expanding tax benefits or credit subsidies for first-time home buyers in the middle-income segment, which stimulates demand for housing, cement, steel, and furnishings—a multi-sectoral boost.

Inflation Control: Continued focus on supply-side measures in agriculture (e.g., National Mission on High Yielding Seeds) to keep food price inflation in check, which is essential for protecting the real disposable income of all households.

Employment Generation

Challenge: Growth can be inclusive and job-intensive, especially for the large cohort of youth entering the workforce. Unemployment, particularly among the educated, remains a structural challenge. High-growth sectors like IT and pharma benefit from depreciation, but labour-intensive sectors need tailored support. The budget can:

Skill India 2.0: Substantially increase allocation for targeted skilling initiatives that are market-linked, focusing on sectors where the US tariffs are not a threat (e.g., healthcare, logistics, renewable energy) and future industries (AI, chip manufacturing).

Manufacturing Focus: Directing Production Linked Incentive (PLI) scheme resources towards sectors like textiles, food processing, and footwear, which have a high employment elasticity (create more jobs per unit of output).

Boosting MSME Credit Flow

Challenge: Despite policy initiatives and their critical role in exports and consumption, MSMEs still struggle with timely and adequate credit. Pre-budget consultations highlighted persistent issues with low credit flow, high risk perception from banks, and strict Non-Performing Asset (NPA) norms. A significant credit gap of about ₹30 lakh crore exists, particularly for micro and women-owned enterprises. The budget can provide structural solutions:

NPA Norms Flexibility: MSMEs have flagged that temporary cash flow mismatches can quickly classify their loans as NPAs, ruining their creditworthiness. The budget could propose a special regulatory forbearance window for short-term MSME distress, distinct from general NPA classification rules, to be administered by the RBI.

CGTMSE Scale-Up: A significant budgetary infusion into the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is necessary. Already, CGTMSE was announced this week for exporters. Increasing the guarantee coverage limit and reducing the premium rates for micro-enterprises and women-led units can make banks more comfortable lending.

Factoring and Delayed Payments: Allocating funds to ensure the TReDS (Trade Receivables Discounting System) platform is utilized by all Central Public Sector Undertakings (CPSUs) and major buyers to alleviate the delayed payments issue, which starves MSMEs of working capital.

External Sector & Currency Challenges

The external environment is characterized by geopolitical risk, trade protectionism, and capital market volatility, all impacting the Indian Rupee.

Managing Rupee Depreciation

Challenge: Continuous rupee depreciation (USD/INR hovered near ₹88.70) fuels imported inflation (especially crude oil, gold, and key inputs) and increases the cost of servicing external debt. While the RBI manages the currency, the budget’s role is to reduce the underlying trade and current account deficits (CAD).

Energy Import Reduction: A massive increase in budgetary allocation for the National Green Hydrogen Mission and Solar Manufacturing PLI is crucial for long-term reduction of fossil fuel imports.

Gold Import Rationalization: The budget may consider regulatory measures or customs duty adjustments on gold to moderate non-essential imports, which are a major drain on foreign exchange reserves.

Containing FPI Outflows

Challenge: Sustained withdrawal of Foreign Portfolio Investment (FPI) from the capital market destabilizes equities and puts direct pressure on the Rupee. FPIs often pull out due to better returns in developed economies (like the US) or perceived risk. The budget can enhance the structural appeal of Indian markets:

Deepening the Bond Market: Introducing measures to simplify FPI access to the Indian government bond market (e.g., further easing of FPI investment limits and operational rules) to attract stable, long-term debt flows.

Promoting FDI: Continuing to liberalize Foreign Direct Investment (FDI) limits in key sectors like insurance (already at 100%) and financial services, as FDI is a more stable source of capital than FPI.

Mitigating US Punitive Tariffs

Challenge: Punitive tariffs (up to 50% on certain Indian goods) by the US threaten export growth in labour-intensive sectors like textiles, steel, and engineering goods.  India cannot directly influence US policy, so the budget can focus on mitigation and diversification.

Targeted Credit Support: The budget can fund and operationalize the export credit and guarantee schemes under the recently announced Export Promotion Mission (EPM), focusing on sectors most affected by the tariffs. This week, few measures were announced in this respect. This includes reducing trade financing costs through interest assistance.

Market Diversification Fund: Increasing the budgetary allocation for the Market Access Initiative (MAI) to aggressively fund trade fair participation, branding, and compliance support for Indian exporters targeting Asia, Europe, and emerging markets.

Ensuring Export Scheme Effectiveness

Challenge: The new Export Promotion Mission (EPM) announced in Nov 2025 can be effectively implemented. Initial reports suggest its ₹25,060 crore outlay over six years might be a starting point, especially when considering the sheer scale of the challenges, and the need for quick operationalization to counter geopolitical risks.  The budget can ensure the EPM is implemented fast.

Financial Augmentation: The annual allocation (estimated around ₹4,200 Cr/year) can be front-loaded and potentially increased to provide meaningful support for logistics, branding, and compliance support (the Niryat Disha component) in addition to interest equalization.

Digital Platform Mandate: The budget could mandate a strict deadline for the development of the EPM's digital platform to ensure that scheme benefits reach MSME exporters without months of delay.

Global Geopolitical Risk

Challenge: The broader geopolitical risk environment continues to threaten specific sectors' export growth, requiring the economy to be more resilient to external shocks. Resilience is built on domestic strength and diversification:

Supply Chain Resilience: Allocating funds to support companies willing to relocate their manufacturing base to India (China+1 strategy) and to invest in dual-use technology (goods that have both commercial and military applications) to reduce dependence on vulnerable global hubs.

FTA Acceleration: Budgetary resources to accelerate trade agreement negotiations with key partners (e.g., EU, UK) to open preferential access to large, stable markets as a counter-balance to the US tariff issue.

Fiscal & Debt Management Challenges

The Union Budget 2026-27 faces a critical balancing act in Fiscal & Debt Management. The core challenge is maintaining the fiscal glide path (which ensures macro-stability) while simultaneously funding aggressive public capital expenditure (Capex) and addressing the fiscal health of the States and high subsidy burdens.

Maintaining Fiscal Discipline

Challenge: The government has committed to a fiscal glide path under the revised Fiscal Responsibility and Budget Management (FRBM) framework, aiming to reach a fiscal deficit target of 4.4% of GDP in FY 2025-26 (down from 4.8% in FY 2024-25), with the ultimate goal of getting below 4.5% by that year. The challenge in the upcoming budget (FY 2026-27) is to continue this consolidation to a projected 4.1% - 4.2% range without cutting essential public Capex, especially given external revenue pressures like slowing export growth due to punitive US tariffs.

Sustained fiscal discipline is vital for lowering the cost of borrowing and maintaining India’s sovereign credit rating (currently 'Baa3' with a stable outlook by Moody's). The budget can demonstrate credible revenue generation.

Revenue Pressure: Despite strong tax compliance efforts (GST rationalization in Sep 2025 boosting consumption), relying solely on tax buoyancy may be risky, especially if the slowdown in corporate profitability persists.

The Trade-off: Any unforeseen expenditure on welfare (e.g., due to geopolitical risk or a poor monsoon) or further counter-cyclical spending to boost private Capex could force a choice: either breach the fiscal target (sacrificing credibility) or cut productive Capex (sacrificing long-term growth). The budget can ring-fence Capex and seek alternative revenue sources like non-tax revenue (dividends from the RBI and PSUs) and strategic disinvestment/monetization.

Financing High Government Capex

Challenge: The government has made public Capex its primary growth driver (e.g., Capex in FY23-24 was three times the FY19-20 level), which has a high multiplier effect, but sustaining this aggressive spending requires massive resource mobilization without resorting to expensive market borrowing that crowds out the private sector.

The budget can diversify Capex funding:

Quality over Quantity: The focus will shift from merely increasing the absolute size of Capex to ensuring the quality and impact of spending. Measures will include mandatory digital monitoring and outcome-based releases for infrastructure projects to maximize the multiplier effect.

Innovative Financing: The budget can allocate capital to institutions like the National Bank for Financing Infrastructure and Development (NaBFID) to allow it to leverage public funds and attract private/pension fund investment for large projects. Mechanisms like Infrastructure Investment Trusts (InvITs) and Asset Monetization can be utilized aggressively to free up government-invested capital for new projects. This ensures that Capex can continue its high trajectory (estimated at 11-12 lakh crore for FY 2026-27) without a commensurate rise in debt.

Addressing State Fiscal Disarray

Challenge: State finances are under strain due to increasing expenditure on welfare schemes, servicing old debts (including those from power distribution utilities), and the uncertainty surrounding the continuation of central grants. The Centre can support the States, especially those whose finances are in "disarray," without weakening its own fiscal position.

The budget will use a carrot-and-stick approach:

Capex Loan Extension: The scheme of 50-year interest-free loans for capital expenditure to States (which was at ₹1.5 lakh crore in the previous budget) can be extended and potentially increased. This supports State Capex, relieves their debt burden, and ensures the national infrastructure pipeline continues uninterrupted.

Reform-Linked Incentives: Funds will be linked to State-level fiscal reforms. For instance, grants for the power sector or irrigation projects will be conditional on States meeting performance metrics, such as reducing power sector losses or implementing the One Nation, One Ration Card system. This uses the budget as a tool for cooperative fiscal federalism with incentives for discipline.

Rationalizing Subsidies

Challenge: Major subsidies (food and fertilizer) are politically sensitive but constitute a massive portion of non-productive government spending. While fertilizer subsidies are essential to protect farmers (especially amid volatile global prices for imported inputs like urea and DAP, which saw supplementary grants in FY 2024-25), food subsidies are crucial for consumption and welfare.

Rationalization will focus on efficiency, not necessarily absolute cuts:

Fertilizer Subsidy Reform: The budget is likely to further push Nutrient Based Subsidy (NBS) for P&K fertilizers and promote alternative, efficient fertilizers like Nano-Urea. Allocations for new missions like the Pradhan Mantri Programme for Restoration, Awareness, Nourishment and Amelioration of Mother Earth (PM PRANAM), which incentivizes States to promote alternative fertilizers, can be scaled up to reduce dependence on costly imported chemical fertilizers.

Targeting of Food Subsidies: The implementation of end-to-end computerization in the Public Distribution System (PDS) and continued use of the Aadhaar-based identification can be prioritized to plug leakages and ensure subsidies reach the intended beneficiaries, thereby controlling the overall subsidy bill. The budget can explicitly allocate funds for technology-based reform to achieve genuine savings.

Managing Debt-to-GDP Ratio

Challenge: India’s General Government Debt-to-GDP ratio (estimated around 81% in FY 2025) is significantly higher than its emerging market peers and remains a key concern for rating agencies. The government's goal is to bring this combined debt burden down to 77% by FY 2031.

Achieving a decline in the debt ratio relies primarily on the 'denominator' – Nominal GDP growth.

Nominal GDP Growth: The budget can ensure that policy measures are conducive to high nominal growth (Real GDP growth + Inflation). Given the threat of Rupee depreciation and FPI outflows, the budget can stabilize macro indicators to encourage higher nominal growth, as a higher nominal GDP growth rate than the effective interest rate on debt is the most potent driver for debt reduction.

Primary Deficit: The focus will be on aggressively reducing the Primary Deficit (Fiscal Deficit minus Interest Payments). A sustained reduction in the Primary Deficit signals that the government is borrowing less to fund current consumption and more for future-oriented Capex, enhancing debt sustainability. The budget can commit to a clear, measurable reduction in the Primary Deficit for FY 2026-27.

The final set of challenges for the Union Budget 2026-27 revolves around structural reforms, long-term sustainability, and execution efficiency. The government can leverage digital tools and capital market momentum while addressing core weaknesses in administration and sectoral resilience.

Sectoral & Administrative Challenges

Leveraging IPO Momentum

Challenge: The successful IPO market, driven by high liquidity and investor appetite, presents an opportunity to deepen the capital market and channel savings into productive investments. However, the budget can ensure retail investor protection against excessive valuations and post-listing volatility, which can lead to a loss of faith in the primary market.

The budget's mandate is to support SEBI's regulatory efforts with necessary resources and policy backing. This involves:

Retail Protection Measures: Supporting SEBI's recent proposals (Nov 2025) to mandate simplified summary documents for IPOs and introducing guardrails on corporate valuations to prevent overpricing, especially in high-growth, high-narrative sectors. The budget can offer tax incentives for long-term retail holding (e.g., holding period of over 18 months) to discourage 'listing gains' flipping, thereby promoting genuine investment.

Deepening Corporate Bond Market: While IPOs focus on equity, the budget can prioritize the corporate bond market through measures like enhancing the Partial Credit Enhancement (PCE) facility to reduce reliance on bank credit for corporate funding, especially for infrastructure projects.

Skilling and Human Capital

Challenge: Despite schemes like PMKVY, a significant gap persists between the skills imparted and the demands of emerging sectors (AI, Green Tech, 5G, Drones). The skilling initiative can be urgently aligned with high-growth, export-oriented industries to create the high-value jobs needed for India’s demographic dividend.

The focus is shifting from simply training numbers to outcome-based skilling:

Industry-Demand Mapping: Allocating funds for a National Skill Registry that dynamically tracks job openings and maps curricula in real-time. This includes scaling up programs focused on Green Jobs (solar panel installation, wind turbine maintenance) and Deep Tech (AI model training, Cybersecurity) in collaboration with IITs and NITs (as proposed under PMKVY 4.0).

Apprenticeship Promotion: Significantly increasing the subsidy under the National Apprenticeship Promotion Scheme (NAPS) and mandating a higher percentage of apprenticeships in all firms benefiting from the Production Linked Incentive (PLI) scheme. This ensures practical, on-the-job training in manufacturing.

Urban Infrastructure Funding

Challenge: Cities are the primary drivers of GDP, yet urban local bodies (ULBs) face a severe funding gap ( Rs.4.6$ lakh crore annually against current investment of  Rs.1.3 lakh crore) due to weak municipal finances and over-reliance on central grants. Sustaining investment in water, sanitation, and transport requires moving ULBs towards financial self-reliance.

The budget can foster a cultural shift in municipal governance:

Municipal Bond Market: Announcing a new incentive scheme that provides competitive, low-interest funding to ULBs that achieve specific milestones in property tax collection efficiency and issue Municipal Bonds. The Urban Challenge Fund announced in the previous budget can be explicitly tied to these reforms to ensure funds only go to performing ULBs, forcing non-performers to raise their standards.

Digital Governance: Allocating funds for mandatory adoption of digital land records and GIS-based property tax mapping across 100 Smart Cities and major urban centres to immediately increase own-revenue generation capacity of municipalities.

Accelerating Green Transition

Challenge: India has ambitious climate targets, including Net Zero by 2070, and needs massive investment to transition its energy and transport sectors. This requires heavy budgetary support to de-risk green projects and maintain momentum, especially in the capital-intensive Green Hydrogen and Renewable Energy (RE) manufacturing value chains.

The budget can catalyse the green ecosystem:

Viability Gap Funding (VGF): Allocating a large VGF corpus for pilot projects in Green Hydrogen, Battery Storage, and Offshore Wind, which are currently economically unviable without government support.

Nuclear Energy Liberalization: Following up on proposals to amend the Atomic Energy Act and the Civil Liability for Nuclear Damage Act (as mentioned in the previous budget) by setting aside funds for a Nuclear De-risking Fund to attract the private sector into Small Modular Reactors (SMRs) and other advanced nuclear technologies, crucial for reliable, low-carbon baseload power.

Ease of Doing Business

Challenge: While India has improved its global ranking, the burden of regulatory compliance, particularly for MSMEs, remains high. The next phase of reform can focus on reducing the cost of compliance and digitally eliminating outdated laws to truly unlock business potential.

This requires a dedicated, time-bound mission:

Regulation : The budget could allocate funds to implement the recommendations of the Jan Vishwas Bill 2.0 by focusing on decriminalizing minor offences and removing redundant legal provisions across all Central Ministries, specifically targeting MSME-related laws.

Single-Window System: Scaling up the existing National Single Window System (NSWS) to encompass all State-level clearances for setting up and operating an MSME, thus reducing the "time tax" associated with obtaining permits and licenses.

Boosting Agricultural Resilience

Challenge: The farm sector is highly vulnerable to climate change (e.g., unseasonal rains, drought) and requires a structural shift towards productivity, diversification, and post-harvest logistics to achieve sustainable growth and address rural distress.

Mission for Diversification: Substantially increasing the budget for the National Mission on Edible Oils and the Mission for Cotton Productivity (mentioned in the previous budget) to reduce import dependence and boost farm incomes. This involves providing R&D and high-yielding seeds.

Climate-Resilient Infrastructure: Allocating more funds for Agri-Tech Infrastructure (e.g., setting up cold storage chains near major consumption centres, incentivizing FPOs to adopt IoT/AI for farm monitoring) and scaling up the reach of PM Fasal Bima Yojana (Crop Insurance) through technology for faster claim settlement.

Deepening Financial Sector Reforms

Challenge: Credit access remains constrained for the unorganized sector, self-help groups (SHGs), and rural poor, hindering their contribution to consumption growth. Existing banking structures often fail to serve these segments adequately.

The budget can focus on last-mile connectivity for credit:

Grameen Credit Score: Allocating resources to fully develop and implement the 'Grameen Credit Score' framework (mentioned in the previous budget) to provide a non-traditional credit score based on PDS usage, utility payments, and SHG track record. This allows banks to underwrite loans for the rural populace previously deemed uncreditworthy.

Fintech Integration: Offering incentives for Fintechs to collaborate with regional rural banks and cooperative banks to use the Digital Public Infrastructure (DPI) stack for credit delivery, extending low-cost credit to the last mile.

Streamlining Tax Compliance

Challenge: Despite previous reforms (faceless assessment, increased income tax exemption limits), the tax system remains complex for small taxpayers and new entities. Widening the tax base without increasing tax rates requires simplification and leveraging technology.

TDS/TCS Rationalization: Implementing the proposal (from the previous budget) to rationalize the dozens of rates and sections of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) to significantly reduce the compliance burden for MSMEs and start-ups.

GST Simplification: While GST is managed by the Council, the budget can allocate funds for AI/ML tools to proactively resolve classification disputes and automate refund processing, speeding up working capital for exporters.

Asset Monetization Pipeline (NMP 2.0)

Challenge: The Asset Monetization Plan 2025-30 aims to generate ₹10 lakh crore by recycling public capital into new infrastructure projects, building on the success of the first NMP (which achieved 90% of its ₹6 lakh crore target). The challenge is achieving this new, higher target by successfully executing complex assets like railways, mining, and urban assets that require specialized transaction structures.

Mandatory Timelines: The budget can mandate strict, year-wise execution targets for the Ministries responsible (Roads, Railways, Power, Coal) and link departmental funding to NMP achievement.

Co-investment Models: Actively facilitating co-investment models involving Sovereign Wealth Funds (SWFs) and Pension Funds to ensure a stable, long-term investor base for InvITs and Toll-Operate-Transfer (TOT) models, thus diversifying the capital pool.

Data and Digital Infrastructure

Challenge: India’s Digital Public Infrastructure (DPI)—Aadhaar, UPI, etc.—is a global success, but the next phase requires significant investment in data governance and next-generation DPI to support a $5-trillion economy.

National Data Governance Framework: Allocating substantial funds to establish the National Data Governance Framework to promote data sharing (with privacy safeguards) among public agencies and with the private sector. This is crucial for planning infrastructure (like through PM Gati Shakti), urban development, and targeted welfare delivery.

Digital Skilling for Government: Funding mandatory digital upskilling programs for civil servants across central and state departments to ensure the new DPI and IT systems are effectively used for e-governance and improving service delivery.

 

Other Strategies

Boost Private Investment & Credit

The core strategy here is to sustain public investment while implementing targeted financial and fiscal tools to crowd-in private capital and alleviate corporate strain.

Capex Loan to States (₹1.75 Lakh Cr)

The Centre is projected to increase the 50-year interest-free loan for State Capital Expenditure from ₹1.5 lakh crore to ₹1.75 lakh crore for FY 2026-27.

Rationale: This scheme is crucial for two reasons: first, it acts as a primary channel for the Centre to boost national Capex without breaching its own fiscal deficit targets (since it’s a loan, not a grant); second, it directly supports States facing fiscal disarray, ensuring they can prioritize infrastructure investment over pressing revenue expenditure (like salaries/pensions). The increase provides vital fiscal headroom to maintain the national infrastructure pipeline momentum.

Mechanism: The funds are often conditional on States undertaking structural reforms, making the loan an efficient tool for cooperative fiscal federalism linked to performance.

Credit Guarantee for MSMEs (Scale-up Fund by 20%)

The budget is expected to announce a 20% scale-up (corpus infusion) into the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

Rationale: Despite the previous budget enhancing the guarantee cover (e.g., up to ₹10 Cr), banks remain risk-averse, leading to low credit flow to MSMEs. A substantial, fresh infusion into the corpus signals the government's commitment to absorbing credit risk, thus encouraging banks to increase collateral-free lending to MSMEs. This directly addresses the biggest bottleneck for MSME expansion, which is essential for job creation and consumption growth.

Revamped PLI Scheme (+15% Allocation)

The annual allocation for the Production Linked Incentive (PLI) Scheme is slated for a 15% increase.

Rationale: The PLI scheme has successfully attracted foreign investment and boosted manufacturing exports. The increased funding is strategically necessary to counter two current threats: a) the punitive US tariffs, which require targeted subsidies to maintain export competitiveness; and b) geopolitical supply chain risks. The additional allocation will be used to expedite disbursement to high-performing sectors and potentially extend incentives to key ancillary MSME vendors, pushing private Capex down the value chain.

Corporate Tax Relief (Accelerated Depreciation)

The budget will maintain the existing low corporate tax rates (e.g., 22% and 15%) but will introduce a one-year window for accelerated depreciation.

Rationale: Given the strain on corporate profitability and the reluctance of companies to launch new Capex, the budget avoids cutting tax rates (which compromises revenue) and instead offers a powerful time-bound incentive. Companies investing in new plant and machinery during FY 2026-27 will be allowed to claim significantly higher depreciation (e.g., 40-50%) in the first year. This immediately reduces their taxable income, boosts cash flow, and forces an immediate investment decision.

Infrastructure Bonds (₹25,000 Cr Corpus for NaBFID PCE)

A dedicated ₹25,000 crore corpus is proposed for the Partial Credit Enhancement (PCE) Facility to be managed by the National Bank for Financing Infrastructure and Development (NaBFID).

Rationale: This corpus will allow NaBFID to partially guarantee bonds issued by infrastructure companies. This upgrades the credit rating of these corporate bonds, making them attractive to long-term institutional investors like pension and insurance funds. It stimulates the corporate bond market, diversifying infrastructure financing away from an over-reliance on stressed commercial banks, and providing a stable, domestic alternative to FPI debt flows.

Asset Monetization Target (₹2.5 Lakh Cr Annual Target)

The government is expected to set a firm ₹2.5 lakh crore annual target for Asset Monetization for FY 2026-27, as part of the five-year ₹10 lakh crore plan (AMP 2.0).

Rationale: Asset Monetization is a critical non-debt capital receipt mechanism. By unlocking value from existing operational assets (highways, power transmission), the capital is recycled to fund new, greenfield infrastructure projects. Maintaining an aggressive annual target ensures the government can sustain its high Capex commitment without increasing debt, directly supporting the fiscal discipline glide path.

II. Support Consumption & Welfare

These actions are focused on increasing household disposable income and providing financial inclusion at the grassroots level to sustain the consumption momentum driven by previous GST cuts.

MSME Support Scheme (₹5,000 Cr)

The previous scheme for First-Time Entrepreneurs (loans up to ₹2 Cr) will see its dedicated budget increased to ₹5,000 crore.

Rationale: This scheme is crucial for inclusive growth as it targets entrepreneurs from marginalized groups (SC/ST, women) and encourages formalization. The increase in funding ensures the scheme can meet projected demand and successfully establish new micro-enterprises. These new businesses quickly generate jobs and salaries, which in turn feeds into consumer demand, providing a sustainable, bottom-up boost to the economy.

'Grameen Credit Score' (₹1,000 Cr Implementation Grant)

A ₹1,000 crore implementation grant is proposed to launch and scale the new 'Grameen Credit Score' (GCS) framework.

Rationale: This framework addresses the financial exclusion of the rural population by using alternate data (e.g., PDS usage, utility bill payments, Self-Help Group track records) instead of formal credit history. The grant will fund the necessary technology platforms, data aggregation, and training. Formalizing credit access for rural populations—who have a high marginal propensity to consume—is a powerful tool for boosting rural consumption and reducing reliance on high-interest informal lenders.

PM SVANidhi Scheme Revamp (+30% Loan/Support Grant)

The budget will provide a 30% increase in the annual loan and support grant for the PM SVANidhi Scheme (for street vendors).

Rationale: Following the mid-2025 revamp (which introduced UPI-linked credit cards and increased loan limits), the scheme requires scaled-up funding to reach its extended target of beneficiaries. This action directly supports the urban informal sector, ensuring the purchasing power of street vendors and micro-traders remains robust. It is a highly effective, inclusive measure to sustain the consumption environment in urban centres.

Rural Development Program (₹30,000 Cr)

A substantial allocation of ₹30,000 crore is proposed for the Comprehensive Multi-Sectoral Rural Program, targeted at 100 developing agri-districts.

Rationale: This program is designed to tackle under-employment in the agriculture sector by funding market-linked skilling, technology adoption, and the creation of rural non-farm employment opportunities (e.g., food processing, logistics). By diversifying and enhancing rural incomes, this program ensures that the base of the economy remains strong and provides a sustainable source of broad-based demand to anchor the national consumption momentum.

III. Countering External Headwinds: A Shield Against Global Volatility

The Indian economy faces a dual challenge from the external sector: persistent geopolitical risk that is disrupting global supply chains and the immediate threat of punitive tariffs, particularly from the US, which are dampening exports. Simultaneously, there is a continuous outflow of Foreign Portfolio Investment (FPI), which pressures the capital account. The budget's countermeasures can, therefore, be proactive, multifaceted, and strategically funded.

Fully Funding the Export Promotion Mission (EPM)

The Export Promotion Mission (EPM), announced in late 2025, is the primary fiscal shield against deteriorating global trade conditions. The geopolitical landscape and specific trade barriers, such as US tariffs, necessitate an aggressive and fully funded approach to market diversification and product enhancement. The budget proposes a total outlay of ₹25,060 Crore spanning five years (2025-30), with a committed and non-negotiable annual release of ₹5,000 Crore. This full and front-loaded funding ensures that the scheme can operationalize immediately, offering targeted subsidies, logistics support, and credit access for new-age and high-value exports like electronics and specialized chemicals. The explicit financial commitment signals to exporters that the government is prepared to absorb a portion of the rising operational risks, thereby enabling them to aggressively pivot away from traditional, risky markets and explore untapped geographies in Africa, South America, and ASEAN nations.

Strengthening Credit Guarantee for Exporters (CGSE)

Export credit flow is the lifeblood of global trade, and the current environment of global volatility has made trade finance expensive and scarce, particularly for Micro, Small, and Medium Enterprises (MSMEs). To address this, the budget proposes a significant strengthening of the Credit Guarantee for Exporters (CGSE) scheme. The target is to provide a total guarantee coverage of ₹20,000 Crore, backed by a dedicated annual guarantee fee of ₹2,000 Crore. This fund serves as a crucial risk-mitigation tool for commercial banks, allowing them to extend affordable, pre- and post-shipment finance to exporters without requiring excessive collateral. By reducing the cost of borrowing and ensuring liquidity, the CGSE acts as a lubricant for export-oriented MSMEs, who are often the first to suffer from global credit tightening, thereby safeguarding their contribution to India’s merchandise trade.

Establishing a Subsidized Currency Hedging Facility

The ongoing depreciation of the Rupee against the US Dollar and other major currencies introduces a high degree of exchange rate risk, which smaller exporters are ill-equipped to manage. As a new action point, the budget introduces a Subsidized Currency Hedging Facility specifically for MSME exporters. An initial corpus of ₹1,000 Crore will be allocated to subsidize the premium cost of forward contracts and other hedging instruments. This mechanism will protect small exporters’ profit margins from sudden and adverse movements in the Rupee, allowing them to quote competitively in long-term contracts. This move is designed to instill confidence and prevent the volatility of the domestic currency from translating into an unnecessary risk premium that hinders export competitiveness.

Liberalizing FDI in Insurance and Financial Sectors

To counter the instability caused by persistent FPI outflows—which are short-term and sensitive to global interest rate changes—the budget focuses on attracting stable, long-term Foreign Direct Investment (FDI). The existing limit for FDI in the insurance sector is proposed to be raised to 100%. This liberalization is strategically coupled with a condition that a substantial portion of the premium investment can remain within India's capital market. This two-pronged approach not only attracts fresh foreign capital but channels it into productive, long-duration assets, strengthening the domestic financial architecture. The continuation and simplification of FDI norms across the broader financial sector aim to make India a more appealing destination for patient global capital, thus providing a structural counter-balance to volatile portfolio flows.

IV. Fiscal Consolidation and Tax Reforms: Enhancing Predictability

The credibility of any budget rests heavily on its commitment to fiscal discipline and the simplification of the tax regime. These measures are crucial for instilling market confidence and boosting the ‘ease of doing business’ environment.

Reaffirming the Fiscal Deficit Glide Path

Despite the continuous need for high public expenditure—particularly for infrastructure Capex—the budget is firm on its Fiscal Consolidation trajectory. The target for the Fiscal Deficit is set to be reduced from 4.4% of GDP (FY 2025-26 Target) to 4.1% of GDP for the upcoming fiscal year. This commitment to reducing the deficit by 30 basis points is a vital signal to global credit rating agencies and international investors. It demonstrates the government’s disciplined approach, reassuring markets that borrowing is primarily for investment purposes rather than routine consumption, thereby keeping inflation and sovereign debt risks under control.

Continued Streamlining of Customs Processes

As part of the ongoing push for Trade Facilitation, the budget continues the process of Customs Process Streamlining. Building on the previous budget's removal of seven tariff rates, the new proposal is to remove five more tariff rates. This incremental reduction in the number of effective Customs Duty slabs simplifies the import-export process dramatically. The primary objective is to reduce the ambiguity and compliance burden faced by traders, speed up cargo clearance, and reduce the scope for disputes and delays. This streamlining is a structural reform aimed at improving India's ranking in the logistics performance index.

Deepening the Simplification of the Direct Tax Regime

The complexity of the Direct Tax Regime has long been a significant compliance bottleneck, especially for small businesses and individual service providers. To ease this burden, the budget focuses on two key structural changes. Firstly, the period for filing an Updated Income Tax Return (ITR) is being extended from two years to four years, offering greater flexibility and relief to taxpayers who have made genuine errors. Secondly, a decisive push for further rationalization of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) provisions is proposed. The goal is to reduce the multiplicity of rates and the sheer volume of compliance filings, which currently lock up the working capital of small enterprises and increase administrative overheads.

Announcing an Explicit Long-Term Debt-to-GDP Target

Market confidence is intrinsically linked to the government’s long-term financial health. While the government has been informally targeting a declining Central Government Debt-to-GDP ratio, the budget proposes the announcement of an Explicit Long-Term Target. This formal declaration, perhaps aiming for a sub-60% combined (Centre and States) Debt-to-GDP ratio within a defined timeframe, is a crucial step towards long-term Fiscal Stability. Instilling such a level of confidence is key to attracting sticky Foreign Portfolio Investment (FPI), anchoring interest rate expectations, and ensuring that government borrowing costs remain manageable in the coming decade.

The elaboration below details eight key action points focused on Countering External Headwinds and ensuring Fiscal Consolidation & Tax Simplification in the Union Budget 2026-27. These measures are designed to safeguard India's trade interests, attract stable capital, and maintain a credible fiscal trajectory.

V. Focus Sectors & Innovation

These investments are critical for positioning India as a global leader in advanced technology, high-value manufacturing, and specialized services, moving towards the "Viksit Bharat" vision.

Nuclear Energy Mission (₹4,000 Cr Annual Allocation)

The government plans to release ₹4,000 crore as the annual allocation for the Nuclear Energy Mission. This is part of the substantial ₹20,000 crore outlay announced in the previous budget for Small Modular Reactor (SMR) Research & Development (R&D).

Rationale: Nuclear energy is a key component of India's commitment to achieving Net Zero targets and bolstering energy security against volatile global fuel prices. SMRs, being smaller, factory-built, and inherently safer, are crucial for decentralized, stable, and low-carbon power generation. The consistent funding ensures the R&D pipeline remains active, and public-private partnerships can be successfully forged. This move signals a deliberate shift towards non-fossil baseload power, complementing the intermittency of renewable sources like solar and wind. The goal is to operationalize at least five indigenously designed SMRs by 2033.

Urban Challenge Fund (₹15,000 Cr Allocation)

The allocation for the Urban Challenge Fund (UCF) will be increased from ₹10,000 crore to ₹15,000 crore. The UCF is a cornerstone of the ₹1 lakh crore initiative aimed at transforming "Cities as Growth Hubs."

Rationale: With over 40% of India's population projected to reside in urban areas soon, cities are the engines of economic growth and require sustained, smart investment. The UCF provides conditional grants and financing for urban infrastructure (water, sanitation, public transport), but the funds are strictly tied to Urban Local Bodies (ULBs) undertaking critical fiscal and administrative reforms (e.g., improving property tax collection efficiency, issuing municipal bonds). The increased allocation scales up this reform-linked funding mechanism, ensuring states prioritize high-multiplier urban Capex and move towards financially sustainable city governance.

Day Care Cancer Centers (Scale to 300 Centers)

The budget commits to scaling the establishment of Day Care Cancer Centers from the 200 planned in the previous year to 300 centers in FY 2026-27.

Rationale: Cancer cases are rising significantly, and decentralizing treatment is a critical social welfare goal. By establishing these centers in district hospitals, the government drastically improves access to affordable and timely cancer care, reducing the need for patients to travel long distances to metropolitan areas. This investment in health infrastructure directly addresses the socio-economic burden of the disease and is a key component of the overall health infrastructure push.

Mission for Cotton Productivity (₹1,500 Cr Annual Allocation)

The government is expected to fully fund the second year of the new five-year Mission for Cotton Productivity with an allocation of ₹1,500 crore (potentially scaling up the previous year's ₹600 crore total outlay).

Rationale: India faces persistently low cotton productivity compared to global standards, which harms farm incomes and makes the domestic textile industry reliant on imported, high-quality Extra-Long Staple (ELS) cotton. This mission, led by scientific research bodies, is designed to support farmers with advanced breeding technology, better seeds, and modern agronomic practices. This investment is crucial for boosting farm productivity, reducing import dependence, and ensuring a stable, high-quality raw material supply for the labour-intensive textile sector.

Centre of Excellence for AI (₹750 Cr Annual Allocation)

The allocation for the Centre of Excellence (CoE) in Artificial Intelligence (AI) is proposed to increase from ₹500 crore to ₹750 crore.

Rationale: AI is the foundational technology for future economic growth. The CoEs are designed to be hubs for high-end research, interdisciplinary AI application, and advanced human capital training aligned with the demands of the global AI industry. Scaling the funding ensures the government can establish more centres (in partnership with premier institutions like IITs and IIITs) and attract top-tier global talent, accelerating the development of India's own AI stack and positioning the country as a leader in emerging technologies.

Expansion of Medical Seats (15,000 Additional Seats)

The budget commits to adding 15,000 additional medical seats in FY 2026-27, moving closer to the goal of 75,000 new seats over five years.

Rationale: Despite progress, India still faces a significant shortage of healthcare professionals, particularly in rural and underserved areas. This continued, targeted expansion of medical education capacity—through new colleges, upgrading district hospitals to medical colleges, and increasing seats in existing institutions—is vital for improving the nation's Doctor-to-Population ratio and enhancing the quality of public healthcare delivery nationwide.

Regulatory Reforms Committee (Mandate and Deadline for First 100 Reforms)

Instead of a simple continuation, the budget will issue a strict mandate and deadline for the Regulatory Reforms Committee to announce and implement the first 100 non-financial regulatory reforms.

Rationale: The focus shifts from merely identifying outdated regulations to enforced implementation. The committee is tasked with reviewing and eliminating or simplifying non-financial regulations (like cumbersome labour, environment, and police compliance procedures) that drain time and resources, particularly from MSMEs. Setting a non-negotiable deadline for 100 key reforms will fast-track the Ease of Doing Business initiative, significantly reducing the "compliance burden" and making India more attractive for private investment and entrepreneurship.

Finally, the budget can future-proof the Indian economy by accelerating the Green Transition. Allocations for Viability Gap Funding (VGF) for Green Hydrogen and Battery Storage pilot projects are essential to de-risk these capital-intensive sectors. Similarly, the budget can allocate funds for a ‘Nuclear De-risking Fund’ to attract the private sector into Small Modular Reactors (SMRs), securing a reliable, low-carbon baseload power source for the future. Investment in human capital can also be scaled up, with the ‘Skill India’ mission urgently realigned to focus on Deep Tech (AI, Chip Manufacturing) and Green Jobs, ensuring India’s youth are equipped for the high-value jobs of tomorrow.