Finance Minister Nirmala Sitharaman will present the Union Budget for the financial year 2026-27 on February 1. The announcement comes at a crucial time. The global economy faces significant tariff pressures and heightened geopolitical uncertainty. These factors continue to disrupt cross-border trade flows worldwide.
Indian Economy Shows Resilience Amid Global Volatility
Despite the challenging international macroeconomic environment, the Indian economy demonstrates remarkable strength and resilience. Analysts widely expect the upcoming budget to prioritize capital expenditure and social infrastructure development. The government appears focused on fiscal consolidation rather than introducing populist measures.
Fiscal Deficit Target and Consolidation Path
Global investment bank Morgan Stanley anticipates the government will target a fiscal deficit of 4.2% of GDP for FY27. This compares to the target of 4.4% of GDP set for FY26. If achieved, this would represent the shallowest pace of fiscal consolidation since FY23.
A team of economists and strategists at Morgan Stanley detailed their expectations in a recent report. They stated, "The pace of fiscal consolidation will be consistent with central government debt reduction to 55.1% of GDP from 56.1% in FY26. A pickup in nominal growth will help to lift tax buoyancy and improve tax collections in FY27, helping the government to prioritize capex and social infrastructure-related spending alongside gradual consolidation."
Over the medium term, the bank envisages the government undertaking gradual consolidation to meet its target. The aim is to reduce government debt to approximately 50% of GDP by FY31.
Key Themes Expected in Budget 2026
Morgan Stanley expects the overall budget theme to reflect several core priorities:
- Focus on expanding both social and physical infrastructure
- Improving ease of doing business to propel private investments
- Creating productive jobs alongside skilling the labour force
- Increasing domestic manufacturing capabilities
- Improving overall ease of living for citizens
Detailed Sectoral Expectations
Real Estate
For the real estate sector, analysts expect the government to consider allowing deductions for interest paid on home loans for self-occupied properties under the new income tax regime. Currently, no such deduction is available under the new regime, while the old regime allows an annual deduction of up to ₹2 lakh. This move could significantly boost housing demand.
Analysts also see a need to revive mid-income and affordable housing demand. They suggest reintroducing the Credit Linked Subsidy Scheme on home loans, offering subsidies of 3–4% of the loan amount. Additionally, they expect the affordable housing price cap to be revised upwards to ₹75 lakh from the current ₹45 lakh. This revision would reflect rising construction and land costs across the country.
"This would expand eligibility for incentives, improve project margins, and help revive supply," Morgan Stanley noted in its report.
Automobile
Key expectations for the automobile sector include higher budgetary support for electric vehicle infrastructure. Greater clarity on schemes aimed at promoting domestic manufacturing of sintered rare earth permanent magnets is also anticipated.
Hotels
Morgan Stanley expects pan-India inclusion of the hotel industry in the infrastructure sector. This classification would help lower the cost of debt for hotel projects.
Financials
For the financial sector, analysts highlight several needs. They call for incentives to promote digital payments and harmonisation of tax treatment on interest income across deposit categories. Expansion of credit guarantee schemes for MSMEs and MFIs is also expected.
Other anticipated measures include enhanced budgetary allocation and simplified processes for availing interest subsidies under PMAY 2.0. Analysts also expect the government to raise the tax rate for life insurers to normal corporate levels.
Energy and Chemicals
Morgan Stanley sees the possibility of a ₹2 per litre increase in fuel taxes in Budget 2026.
Metals and Cement
Outlays for cement- and steel-intensive sectors will be a key area to watch. This focus aligns with the government’s continued infrastructure push. Analysts expect higher allocations toward affordable housing under PMAY. Policy measures or spending aimed at critical minerals and rare earth elements are also likely.
Consumer
Analysts expect general measures in the Budget 2026 to revive consumption across the economy.
Telecom
For the telecom sector, Morgan Stanley expects relief on Universal Service Obligation Fund charges until the existing corpus is exhausted. Other anticipated measures include a reform package related to adjusted gross revenue dues.
An exemption of service tax on incremental licence fees and spectrum usage charges arising from the Supreme Court’s AGR ruling is also expected. A reduction in overall licence fees could provide further relief.
The analysts also expect an extension of the carry-forward period for business losses from eight years to sixteen years. Support for data centre developers could include conditional tax holidays linked to capacity or green energy targets. Customs duty waivers on imported equipment such as GPUs, or higher GST input tax credits, are also possible.
Industrials
Infrastructure: Overall allocation is expected to rise by 8–10%, with a focus on growth over revised FY26 expenditure estimates.
Railways: Expect 5-6% growth in allocation across areas like track infrastructure, new routes, safety systems, and rolling stock. Details on three new corridors and new trains are likely to be announced.
Defence: Expect 12-15% growth in allocation. Key to watch would be allocation for local and private defence companies.
Energy Generation: Reiteration of government thrust on clean energy across renewable energy, BESS adoption, nuclear, and pumped storage projects.
Energy Distribution: Financial package for discoms with conditions to undertake reforms to improve financial health and possible privatization.
Electronics: The Central government is working on the Semiconductor 2.0 package to increase value addition and enhance the ecosystem in India.
Internet and eCommerce
Morgan Stanley expects incentives to promote startups adopting emerging technologies such as AI/ML, quantum computing, and blockchain. The analysts also see scope for broader tax benefits on ESOPs to cover a larger pool of startup employees.
Media
Reduction in DTH License fee and other policy changes per TRAI recommendations on DTH Services are anticipated.
Pharma
The analysts expect continued emphasis on increasing public health spending. The focus will likely be on primary healthcare, hospital infrastructure, and workforce capacity. Likely measures include incentives for innovation, R&D tax benefits, and steps to enhance cost competitiveness.
These steps aim to reinforce India’s position as the "Pharmacy of the World." Continued support for APIs through PLI schemes, reduced import dependence for critical drugs, expansion of Ayushman Bharat, and initiatives to improve access to essential medicines are also expected.
Disclaimer: The views and recommendations mentioned above are those of individual analysts or broking companies. They do not represent the views of Mint. Investors are advised to consult certified experts before making any investment decisions.
