Budget 2026-27: Sound math fails to meet soaring market expectations

Union Budget 2026-27 presents a credible and pragmatic fiscal framework amid global uncertainty, but markets sold off as heightened expectations and a surprise STT hike weighed on investor sentiment

Budget 2026 market reaction: At a time when India is navigating considerable global uncertainty, the Union Budget's emphasis on structural reforms and maintenance of a stable policy regime is particularly welcome.

 

Budget 2026 delivers a pragmatic blueprint, shaped by global headwinds and domestic fiscal realities, that strikes a balance between ambition and prudence. Its underlying mathematics appears sound and credible, built on conservative revenue projections and aggressive funding for critical expenditure priorities.

Why markets reacted negatively to Budget 2026?

 

However, markets reacted negatively, not because of fiscal weakness, but because the budget failed to meet the heightened expectations that had built up in the run-up to its announcement. 

 

The disappointment was compounded by an unexpected increase in the Securities Transaction Tax (STT) on derivatives trading, a surprise that caught market participants off guard. This measure, aimed at discouraging speculative trading, jolted investor confidence and triggered a sharp sell-off despite the budget's otherwise reasonable fiscal framework.

 

The market was looking for immediate measures to turn around investor sentiment and attract foreign inflows. Investors anticipated that, even if STT were raised, it would be accompanied by reductions in capital gains tax. 

 

The interest burden has risen from 47.6 per cent to 49 per cent of net tax revenues to the Centre, a development unlikely to enthuse credit rating agencies.

 

In a shift in the government's revenue composition, GST and other indirect taxes now constitute merely 15 per cent of total resources mobilised in the Union Budget 2026-27, marking a significant decline from the 18 per cent share they commanded in the previous fiscal year. This three-percentage-point contraction in indirect tax contribution reflects the prior year's impact of comprehensive tax rationalisation measures.

 

The capital expenditure allocation of ₹12.22 trillion, representing 4.4 per cent of GDP, is the highest in at least a decade and a remarkable achievement given the constraints of limited tax inflows.

 

The Centre has done what it reasonably could to provide for capital expenditure. However, the real test ahead lies in whether private sector capex can accelerate sufficiently to complement government spending. Achieving the budgeted nominal GDP growth of 10 per cent will require close monitoring and concerted effort from all stakeholders.

 

For instance, while the 15-per cent increase in total allocation to the Ministry of Defence to ₹7.8 trillion moves in the anticipated direction, it still fell short of heightened market expectations.

 

The government has significantly raised the divestment revised estimates from ₹33,837 crore to an ambitious ₹80,000 crore under miscellaneous capital receipts in this budget.​ This sharp revision signals renewed optimism for stake sales in PSUs and asset monetisation, aiming to bolster non-tax revenues. 

 

The liberalisation of investment norms for NRIs represents a welcome measure to attract much-needed capital to Indian markets, signalling the government's commitment to broadening the investor base. While the enhanced STT regime for derivatives may create near-term headwinds for capital market participants, it reflects a long-term vision for market stability and maturity, a necessary recalibration for sustainable growth.

 

The establishment of a High-Level Committee on Banking for Viksit Bharat, tasked with comprehensively reviewing the sector and aligning it with India's next phase of growth while safeguarding financial stability, inclusion, and consumer protection, is a commendable step forward.

 

The government's sustained focus on deregulation deserves particular mention. Over 350 reforms have been rolled out, encompassing GST simplification, notification of Labour Codes, and rationalisation of mandatory Quality Control Orders. The formation of committees and the Central Government's collaboration with state governments to reduce compliance requirements demonstrate a systematic approach to ease of doing business.

 

Meanwhile, the budget's recognition of the tourism sector's potential to drive employment generation, forex earnings, and expansion of local economies is welcome and reflects an appreciation of India's diverse strengths.

 

Finally, the proposal to provide tax holidays until 2047 for foreign companies providing cloud services globally using data centre infrastructure in India demonstrates long-term strategic thinking. By enabling critical infrastructure and boosting investment in data centres, this measure positions India favourably in the global digital economy for decades to come.

   

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Disclaimer: Devarsh Vakil is Head of Prime Research at HDFC Securities. Views expressed are personal.