As India prepares for Union Budget 2026 amid global uncertainty, policymakers are betting on capital expenditure, exports and selective reforms to keep growth near the world’s fastest pace
Our Bureau
New Delhi
As the Indian economy steps into 2026, optimism is tempered by caution. Growth prospects remain strong by global standards, yet the policy choices ahead reveal a government keenly aware that momentum cannot be taken for granted. The upcoming Union Budget is expected to set the tone for this balancing act—ambitious enough to sustain growth, disciplined enough to reassure markets, and flexible enough to respond to external shocks.
According to estimates by Bank of Baroda economist Sonal Badhan, the government is likely to target growth of 8.5–9 per cent next year, supported by a substantial increase in capital expenditure to around ₹12–12.2 lakh crore. This is not just a headline number. Public capex has become the central pillar of India’s post-pandemic growth strategy, filling the investment gap left by a cautious private sector and laying the groundwork for longer-term productivity gains.
Fiscal consolidation, however, remains part of the narrative. The government is expected to meet its FY26 fiscal deficit target of 4.4 per cent and lower it further to around 4–4.1 per cent in FY27. That trajectory reflects a conscious attempt to balance growth with credibility. Markets have largely rewarded this approach, seeing India as one of the few major economies capable of pursuing expansion without abandoning fiscal discipline. The assumption of nominal GDP growth of around 10 per cent also provides room to manage this delicate equation.
What is notably absent from the policy mix is the prospect of major tax cuts. After last year’s income tax changes and GST 2.0 rationalisation, further relief appears unlikely. Instead, the government seems inclined to focus on targeted interventions rather than broad-based giveaways. This signals a shift from stimulus-driven policy to one aimed at structural strengthening.
In a global environment marked by slowing demand, geopolitical tensions and fragile supply chains, exports and MSMEs are expected to take center stage. The government has already reduced customs duty slabs and simplified compliance. Further rationalisation—particularly lower duties on key raw materials—could help improve competitiveness and ease cost pressures. An interest subvention scheme for MSMEs and exporters is also on the cards, reflecting the recognition that smaller firms remain vulnerable to both global volatility and domestic financing constraints.
The external sector offers a mixed but encouraging picture. India is on track to cross USD 850 billion in total exports in FY26, building on last year’s record of USD 824.9 billion. Services continue to be the standout performer, growing at over 6 per cent, while merchandise exports have shown resilience despite weak global trade. December’s uptick in goods exports underscores this quiet resilience.
Yet rising imports have widened the trade deficit to nearly USD 97 billion for the April–December period, up from USD 88 billion a year earlier. This is not necessarily alarming in isolation—capital goods and energy imports often rise alongside growth—but it reinforces the need for export competitiveness and trade diversification. More free trade agreements, correction of inverted duty structures and a steady reduction in average customs duties could play a critical role in sustaining momentum.
Monetary policy is likely to remain supportive but cautious. Bank of Baroda expects the RBI to deliver a final 25-basis-point rate cut in FY26, aimed at nudging growth without stoking inflation. With GDP growth estimates broadly aligned between the government and the central bank, major forecast revisions appear unlikely. Instead, liquidity management through open market operations may do the heavy lifting, especially if global financial conditions tighten.
A separate PLI focused on research and development is also under consideration. Such a move would signal a shift from assembly-led manufacturing to innovation-driven growth. The possible inclusion of new-age sectors—artificial intelligence, space exploration and robotics—points to an ambition to position India not just as a manufacturing hub, but as a technology and innovation ecosystem. If executed well, this could also attract higher-quality foreign direct investment.
Risks, however, remain ever-present. External headwinds—from global monetary tightening to geopolitical disruptions—could test India’s assumptions. Policymakers appear realistic about this uncertainty, emphasizing adaptability rather than rigid planning. Disinvestment and asset monetization, while no longer center-stage, are expected to provide steady, if modest, revenue support, with asset monetization increasingly outpacing traditional disinvestment.
Taken together, India’s economic planning for 2026 reflects a country confident in its fundamentals but wary of complacency. The emphasis on capex, exports, MSMEs and emerging technologies suggests a long-term vision, while fiscal discipline and measured monetary easing underline prudence. The challenge will be execution—ensuring that big numbers translate into broad-based gains. If that balance holds, 2026 could mark another decisive step in India’s growth journey.
