Union Budget 2026–27: Fiscal Priorities, Tax Choices and India’s Economic Strategy

For the record 9th time, the Finance Minister Nirmala Sitharaman prepares to present the Union Budget for 2026-27 on 1st February 2026. This exercise has more significance than a routine fiscal update. As India emerges as one of the world’s fastest-growing economies, it faces a blend of domestic challenges, opportunities and global risks.

Illustration by The Geostrata

Slowing global demand, trade fragmentation, U.S. tariff pressures and weakening investor sentiments call for a budget which balances growth with fiscal sustainability. The choices made for FY27 will shape short-term economic goals as well as India’s long-term competitiveness in a disrupted world.

NAVIGATING GROWTH AMID GLOBAL FRAGMENTATION

India’s macroeconomic base remains solid. India will likely achieve a real GDP growth of 6.5-7% in FY27 against the global backdrop, which is a sign of continuous domestic momentum and structural growth drivers. Nominal GDP growth, which is an important determinant of the government’s fiscal math, is forecast at 10.5–11% for FY27. FY27 is an essential benchmark for revenue projections and deficit calculations. 

Hence, fiscal strategy is expected to remain focused on consolidation with a slight shift from mere deficit reduction to stabilising the debt-to-GDP ratio. Economists widely expect the fiscal deficit for FY27 to be clipped to about 4.2% of GDP from the estimated 4.4% for FY26.

However, some analysts argue that the government may choose to maintain the fiscal deficit at 4.4% for FY27 to support growth-oriented expenditures.  Debt sustainability remains a central consideration with a clear intent to manage the public debt judiciously. A declining debt ratio will boost investor confidence and support sovereign ratings in a volatile global landscape.

Government investment in infrastructure has been recurring in recent budgets. Capital expenditure is likely to exceed ₹12 lakh crore, as of the earlier 11.21 lakh crore budgeted for FY26 and will account for almost 3% of GDP, reinforcing its role as a major stimulus for growth. Capital allocations remain focused on strategic segments like transport, logistics, power and urban infrastructure, which will reduce logistic costs, boost connectivity and enhance export growth and competitiveness.

Last financial year demonstrated the prioritisation of physical infrastructure as more than half of the central government’s capital expenditure was directed toward roads and railways. Government expenditure for FY27 is seen as a growth stimulus and a structural tool to integrate India into the diversified global supply chains.

RETHINKING INDIA'S TAX ARCHITECTURE

Now, coming onto the most watched facet of the budget, the tax policy. Since the implementation of the new simplified tax regime, the government has worked to nudge taxpayers towards it through more attractive and lower tax rates. However, the old regime with its array of deductions still attracts many. This time too, the government is expected to pursue this gradual transition strategy, and might try to bring in wider slabs and a possibly higher standard deduction of up to ₹1 lakh for salaried taxpayers in order to make the new regime more lucrative. 

Sudden removal of the old regime appears to be unlikely as policymakers realise that abrupt changes may disrupt the household planning, housing, retirement savings, insurance and domestic consumption behaviour. Expert discussions suggest marginal tweaks or slab restructuring may help, which will balance revenue stability with taxpayers' relief. Moreover, middle-class taxpayers are expected to benefit more from tax rationalism. Increasing standard deductions, rather than major headline rate cuts, will help, given the government’s need to preserve revenue buoyancy amid consolidation goals.

Capital gains taxation remains a major concern for market players. As compared to other emerging economies, India’s long term capital growth and short term capital growth tax structure are seen as hurdles which dampens investment returns. Large rate cuts are unlikely in budget 2026-27 but there may be higher exemption thresholds for long term capital gains and simplification of holding-period norms.

This will promote predictability and broaden market participation.  Investor sentiment ahead of the budget underscores high expectations for reforms in capital markets, rationalisation of Securities Transaction Tax, incentives for startups and manufacturing and simplified frameworks to boost investment and FDI flows.

LOGISTICS ENERGY AND STRATEGIC CAPITAL

Infrastructure has become a major component in global supply-chain realignment. With tariff uncertainty from the U.S. trade posture and the implementation of the India–UK Comprehensive Economic and Trade Agreement (CETA) in 2025, India’s logistical efficiency is central to its export competitiveness.

The Railways sector is expected to be a major beneficiary in Budget 2026-27. The railways received ₹2.00 lakh crore capital in FY26, which reflected the government's emphasis on freight efficiency and network modernisation. With over 1.6 billion tonnes of freight carried in FY25, railways’ role in reducing transport costs and energy intensity is critical.

Investments in Dedicated Freight Corridors, trains like Vande Bharat, Amrit Bharat and railway station redevelopment aim to further improve capacity and reliability. India’s logistics costs declined to 7.97% of GDP in FY24, showing a sharp improvement from earlier double-digit estimates and closer to global benchmarks. Ports and shipping infrastructure, which handle over 95% of India’s trade by volume, are expected to receive continued support under the Maritime India Vision 2030  and Maritime Amrit Kaal Vision 2047  through port modernisation, ship building capacity, coastal shipping and multimodal logistics parks.

The energy sector sits at a crossroads of industrial growth, climate commitments and geopolitical credibility. India’s installed capacity has crossed 475 GW, with non-fossil sources accounting for over 40%. This budget will continue to balance conventional capacity with a strong push for renewables. Grid modernisation, energy storage, solar manufacturing and green hydrogen are to be under inspection.

India aims to become a major global supplier by 2030, backed by a budgetary outlay of nearly ₹20,000 crore under the National Green Hydrogen Mission. The Green Hydrogen Taskforce under the India-EU FTA also aims to accelerate production, trade and standardisation of green hydrogen.

This will enable India to leverage its low-cost renewable energy for large-scale production, reducing export barriers to Europe and strengthening its position as a global green energy hub. Climate-aligned growth has emerged as a key determinant of global capital flows, as discussed in the World Economic Forum.  Green infrastructure, clean mobility and climate-resilient urban development are attracting ESG-linked investment. Sustainability is now integral to India’s global economic positioning.

POSITIONING INDIA IN THE NEXT TRADE ORDER

Manufacturing and exports are keys to India’s growth strategy, but the external environment has become more challenging. As global demand remains uneven amid U.S. tariff pressure and persistent geopolitical and supply chain uncertainties, India’s GDP growth, projected at 6.5-7% in FY27, underscores the need to strengthen domestic growth engines. The government is expected to prioritise systemic competitiveness rather than broad subsidies. Infrastructure quality, logistics efficiency and regulatory certainty are the most critical factors for new manufacturing investment.

The India-EU FTA, also termed as the  “Mother of all Deals”, agreed in January 2026, is expected to cut tariffs on 96.6% of traded goods by value, boosting market access and may push bilateral trade towards $200 billion by 2030.

There will be increasing pressure on the Indian industry to align with manufacturing standards, customs norms and supply chains benchmarks. The German Chancellor’s visit resulted in 19 pacts, including a defence-industrial cooperation roadmap and semiconductor partnerships, helping deepen economic and technological ties. Fiscal incentives for exporters, customs duty rationalisation and trade facilitation measures are likely to feature in the budget 2026-27, particularly for sectors integrated into global value chains like auto components, pharmaceuticals and textiles.

Defence spending is being shaped by the rising geopolitical volatility, with allocations likely to rise beyond ₹6.2 lakh crore provided in FY26, reflecting heightened regional security concerns. Domestic defence manufacturing, advanced technology and exports will be emphasised as India’s defence exports already exceed ₹21,000 crore annually in FY24.

High-value acquisitions such as the Rafale M fighter jet deal with France, valued at around €7.8 billion and the procurement of S-400 air defence systems from Russia, shows India’s focus on advanced naval and air defence capabilities. Domestic programmes, including the Tejas light combat aircraft, indigenous artillery, naval shipbuilding and missile systems, further strengthen self-reliance.

The digital economy is also expected to receive calibrated support through investments in digital public infrastructure and innovation ecosystems, as this sector contributes nearly 11–12% of GDP. Healthcare and agriculture remain essential for inclusive growth. Public healthcare expenditure accounts for over 2% of GDP, and there is a growing consensus fora gradual increase in primary care, productivity and access.

Overall, Budget 2026-27 is expected to continue with strategic refinement. Global trade fragmentation, shifting alliances and climate-driven capital flows will shape India's fiscal choices. India aims to balance growth with consolidation and domestic priorities with deeper global integration.

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BY VINAYAK AGARWAL

TEAM GEOSTRATA

info@thegeostrata.com