Budget 2026: A status quo Budget with limited appeal for global investors

Markets disappointed as Budget 2026 sticks to fiscal discipline but offers no big ideas to revive investor confidence or attract fresh foreign capital

The markets have reacted negatively to the Budget. The main disappointment seems to be the lack of any movement on capital gains tax for equity investors. Most market players were caught by surprise by the substantial increase in securities transaction tax (STT) on derivatives and are worried by the large gross market borrowing number of ₹17.2 trillion. Many feel that interest rates will increase as the ₹17.2 trillion number does not include ₹1.3 trillion budgeted for short-term borrowings/T-bills.

 

There was a feeling that this Budget would be used as an instrument to attract foreign capital, both foreign direct investment (FDI) and foreign portfolio investment (FPI), through certain targeted incentives. We have seen FPIs sell over $40 billion of equities since September 2024 and India has received no net FPI flows for over five years. Even in FDI, while the gross flows may be reasonable, net flows are less than $10 billion per annum — too low for a country with the size and potential of India. We are in a very volatile geopolitical and economic environment; the rupee remains under pressure despite strong macro fundamentals. We have to push to attract foreign capital as it is needed for the sustainability of our growth story.

 

The Budget arithmetic is reasonable. We are targeting a fiscal deficit of 4.3 per cent, after hitting the FY26 target of 4.4 per cent. For FY27, nominal GDP growth is assumed to be 10 per cent, gross tax revenues are projected to increase by 8 per cent, with corporate tax and income taxes rising by 11 per cent and 11.7 per cent, respectively. Indirect taxes are budgeted to rise by only 2.3 per cent as we have a full year of the new GST rates. Gross tax revenues have fallen to 11.2 per cent of GDP, given the cuts in tax rates.

 

Non-tax revenues are flattish, with total revenue receipts of the central government growing by only 5.7 per cent. The government’s total expenditure will grow by 7.7 per cent to  ₹53.47 trillion. The total increase in expenditure of the government in FY27 is budgeted to be ₹3.82 trillion. Of this increase, ₹3.1 trillion will go to boost the effective capital expenditure of the central government (capex and grant in aid for capital asset creation). The balance ₹70,000 crore is more than eaten up by an increase of ₹1.3 trillion in interest payments. Thus net of an increase in interest payments and grant in aid, the central government has actually budgeted to shrink revenue spending in FY27. This is visible in subsidies, which are actually budgeted to decline by ₹19,240 crore in FY27. This is admirable spending control, especially in the context of what is happening on revenue expenditure of the states.

 

Central government capex, which is estimated to grow by 11.5 per cent to ₹12.2 trillion, is largely spent on defence capital equipment, roads and rail. All three have seen increases. Defence capital expenditure has increased 18 per cent from ₹1.86 trillion to ₹2.19 trillion; Railways net capex has risen by 10 per cent to ₹2.78 trillion, and roads by 8 per cent to ₹2.94 trillion. The mix of total expenditure towards capex has improved to 32 per cent in FY27 from as low as 21 per cent in FY18 (including grant in aid to states). The worry is the ability of the government to continue increasing this number over time, as its capital spending seems to be stagnating at 3.2 per cent of GDP.

 

The only weakness in the Budget arithmetic is the assumption of ₹80,000 crore in divestment receipts, and the expectation of ₹3.16 trillion in dividends from the Reserve Bank of India/public sector banks — a historically high number on both counts.

 

Despite the tight control on expenditure, the government has increased the money allocated to rural employment guarantees from ₹88,000 crore to ₹125,692 crore. There are also hefty increases in spending for the Jal Jeevan Mission and the PMAY urban and rural schemes.

 

In terms of more structural issues, the rejigging of the tax on buybacks is positive and should hopefully encourage companies to once again return capital through this route. There has been a very serious effort to give certainty on taxation for global capability centres  and captives, through the use of safe harbour provisions and many other procedural changes in taxation to improve ease of business. The new income tax Act will come into force in FY27 and there seems to be an attempt to simplify and decriminalise various processes. Cuts in the tax collected at source on overseas education and medical bills are welcome.

 

The continued focus on the electronics components sector is important with an additional allocation of ₹40,000 crore. There are various new schemes to help develop rare earth magnets, chemicals, bio pharmaceuticals, semiconductors and the capital goods sector. A comprehensive package has been put together to help textiles and various support measures have been announced for MSMEs, including ₹10,000 crore for equity support and measures to ease working capital. Lots of focus on Tier-II urban centres, incentives for municipal bonds and seven new high-speed rail links. For the youth, there is focus on healthcare job creation, university townships and tourism. There seems to be an attempt to simplify Customs procedures for credible exporters.

 

There is nothing very negative in the Budget. It continues down the path of fiscal correction, and continues to improve quality of expenditure with prioritisation on capital spending. Given the weak revenue picture, there was not much scope to do anything dramatic. However, I think investors are not seeing any big ideas from the government either. There is nothing in the Budget that captures the imagination as to how India will navigate and take advantage of the choppy global waters we are currently sailing in. There is nothing in this Budget to change a global investor’s view of the country. Those who are negative will remain so. They will cite high valuations, capital gains tax and weak earnings. With limited scope to further increase central government capex will this Budget kick start the long-awaited private sector capex cycle?

 

We have built a world-class equities market, both primary and secondary. The increase in STT will only raise ₹10,000 crore but will hurt trading volumes and liquidity substantially. Why take any risk on domestic flows? If we want to reduce derivatives speculation, there are other tools in terms of margins and contract size.

 

India will remain a stock-specific market, we can see a turn either when earnings accelerate or the AI trade wobbles. The consolidation phase will likely continue.

The author is with Amansa Capital