This year’s Union Budget is going to be presented at a moment of unprecedented global turbulence. The global economy is being shaped by tariffs, trade wars, and political turmoil. Supply chains are fragile, geopolitics is intrusive, and economic nationalism is back in fashion.
Yet, amid this global unease, it is indeed a big relief to see that India finds itself in a relatively stable position. Inflation is low, growth is recovering, high-frequency data is very promising, and macroeconomic indicators are largely under control. That stability gives the government enough space to act, but it also places a responsibility on us to act wisely.
It’s heartening to know that the central question before Budget 2026 is no longer how to rescue the economy from a crisis. Thankfully, that phase has passed. The question now is how to steer India towards sustained, high-quality growth without losing macro discipline. In many ways, this is a far better problem to have.
I come from the markets and interact with industry captains, exporters, and investors on a daily basis. There is broad agreement among economists and market participants on one important point: the heavy lifting on stimulus has already been done by the Modi government. What the economy needs now is patience, reform, and better coordination, especially between the Center and the states. In my view, Budget 2026 should reflect this shift in mindset.
Budget 2025 marked a decisive policy moment. Without waiting for a crisis, the government delivered a strong mix of structural reforms, fiscal support, and monetary easing. Capital expenditure was protected, GST was rationalized, and tax relief was given with a focus on accelerating growth. The Reserve Bank eased liquidity and reduced interest rates significantly. Taken together, these actions amounted to a large and pre-emptive stimulus.
Slowly but steadily, the results are beginning to show. Domestic demand is slowly improving. Consumption is stabilizing as purchasing power recovers. Labor market conditions are better than they were a year ago. Growth is picking up pace, even if unevenly. This is precisely why there is no need for another round of large stimulus. The economy needs time for the measures already announced to fully play out.
Equally important is the fact that the government demonstrated fiscal discipline even while supporting growth. Despite a supportive stance, it stayed committed to consolidation. That credibility matters. This has helped anchor inflation expectations and investor confidence.
Budget 2026 should build on this foundation. To my mind, the broad direction is clear: Fiscal discipline must be preserved. Targeting a fiscal deficit of around 4.2 percent of GDP, roughly 20 basis points lower than the previous year, would keep India on course to gradually reduce public debt towards 50 percent of GDP and bring the deficit closer to 3 percent by the end of the decade. This is not about ratings or optics, but about securing long-term financial stability and policy credibility.
What I anticipate is that growth over the next year is expected to be driven primarily by domestic demand, not exports. India’s GDP growth is projected to average around 7 percent in FY2027. Inflation is expected to remain close to the RBI’s 4 percent target, giving policymakers the desired flexibility. The current account deficit remains manageable, supported by services exports and remittances, even as trade uncertainties with the US persist. We cannot be prisoners of the US administration’s whims and fancies
Markets are approaching the budget cautiously. Budget-day volatility has declined over time, but expectations still matter. A budget that avoids excessive fiscal tightening, protects capital expenditure, and signals continuity of reforms could surprise positively.
One of the most important structural challenges that Budget 2026 should address is the growing imbalance between equity and debt financing in India’s economy. Household savings behavior has changed sharply. Younger generations are saving less. A larger share of savings is moving into physical assets such as real estate and gold. Within financial savings, equity investments have risen rapidly.
This is not a bad development by itself. A vibrant equity culture is healthy. But relying too heavily on equity while neglecting debt is risky at this stage of India’s growth. I believe a better balance between debt and equity would strengthen the financial system in three important ways.
First, stronger bank deposits would improve the financial stability of banks. This is critical for supporting the next credit cycle. Second, companies, especially MSMEs, rely far more on credit than equity. Excessive dependence on equity financing limits their growth options. Third, stronger domestic savings in deposits help the government finance its borrowing needs internally, reducing reliance on foreign capital. This directly supports Prime Minister Narendra Modi’s goal of economic self-reliance.
Two policy steps can help correct this imbalance. The first is to gradually narrow the large tax gap between equity and debt investments. Today, equity enjoys a significant tax advantage. This discourages households from investing in debt products. A more balanced tax treatment would make fixed-income investments attractive again.
The second is to expand the range of debt products and allow more flexibility for global investments. This would reduce pressure on domestic equity valuations, attract foreign capital, and strengthen the balance of payments. Strong capital inflows support the currency, bank deposits, and overall financial stability.
Another underappreciated issue is state-level reform. The central government has done much to boost manufacturing and infrastructure, but growth cannot accelerate evenly unless states act. Some states are showing the way. Uttar Pradesh, Maharashtra, Andhra Pradesh and Telangana have taken important steps.
Electricity reforms by a few states are a strong example. By restructuring how free power is delivered to farmers, government schools, and low-income households, the state improved the financial health of its power distribution companies. This creates space for lower industrial tariffs, making manufacturing more viable and job creation more likely.
Similarly, a few states like Maharashtra have introduced simple administrative reforms like the decision to allow shops to operate 24×7 and relax labor hour norms, which is bringing a large economic impact. These are state subjects. All states can implement them without political cost. The idea that reforms automatically lead to electoral defeat is increasingly outdated. What matters is design and communication.
India also faces a balance of payments challenge, even amid record gross FDI inflows. The reason is large capital outflows. Foreign investors are booking profits and taking money out. In recent years, FDI outflows and foreign portfolio selling together have exceeded $90 billion annually.
This is not necessarily bad. It reflects the fact that investors are making money in India. But it does create pressure. Taxing outflows would be a serious mistake. That would scare away inflows. So, we should not even think of taxing outflows.
The solution lies in encouraging longer-term investment and diversifying capital pools. Simplifying taxation in GIFT City, making capital gains tax zero for investments coming through GIFT City, fixing buyback taxation, and widening the foreign investor base can help offset outflows.
In this context, the recent Supreme Court judgment in the Tiger Global case needs our attention. While the ruling strengthens tax fairness and reinforces the principle of substance over form, it has also created unease among global investors about retrospective interpretation and tax certainty. Left unaddressed, such concerns could gradually weigh on investment sentiment. It is therefore important for the government to respond proactively, through clear legislation and transparent rules, to ensure that tax enforcement does not inadvertently undermine India’s growth ambitions.
Looking ahead, most experts agree that the next phase of public capital expenditure should focus on manufacturing and urban infrastructure. India has invested heavily in highways and railways. The next growth driver will be urban roads, ring roads, housing, and city infrastructure.
Targeted industrial support, similar to PLI but focused on domestic manufacturing rather than exports alone, can help. Selective subsidies, such as those for semiconductors, show how focused support can work. At the same time, recurring expenditure must be controlled. Subsidies, salaries and pensions should grow slower than nominal GDP to preserve fiscal discipline.
Ultimately, Budget 2026 should not be about dramatic announcements. It should be about follow-through. The government has already done enough on consumption and stimulus. The priority now is manufacturing, capital expenditure, and structural reform.
Also, better Centre-state coordination will be critical. Fixing the debt-equity imbalance will be essential for financial stability. Managing capital flows wisely will protect macro stability.
If Budget 2026 gets these fundamentals right, markets are likely to respond positively. More importantly, it will lay the groundwork for sustained growth over the next decade and move India closer to its long-term goal and the Prime Minister’s vision of becoming a developed economy by 2047.
Syed Zafar Islam is national spokesperson, BJP, and former managing director, Deutsche Bank. The views expressed are personal
