Budget 2026: Fiscal stability over surprises; long-term growth in focus

Union Budget 2026 avoids tax shocks, stays committed to fiscal discipline and capex-led growth, with long-term implications for equities, bonds, and fixed income investors, writes Basant Bafna

The Union Budget for FY27 was, in many ways, a non-event for financial markets. With no major announcements on taxation or fiscal surprises, the immediate reaction is expected to be muted. Yet, the absence of headline-grabbing measures should not obscure the underlying narrative: this budget is about continuity, stability, and a deliberate push toward aligning India’s growth story with global themes. 

 

Budget 2026 is less about short-term populism and more about laying the foundation for the next five years of structural transformation.

 

The government's priorities are evident in the sectors chosen for emphasis. MSMEs and legacy industries continue to receive support, but the real thrust is toward future-facing areas—biopharma, electronics manufacturing, rare earth metals, semiconductors, and infrastructure. These are industries that will determine India's place in global supply chains and technological ecosystems. 

 

 

The focus on urban development and rejuvenation of cities signals an ambition to create hubs of innovation and productivity, while skill development initiatives, particularly those encouraging creativity, aim to prepare the workforce for a rapidly evolving economy. Tourism, often overlooked, has also been given attention, reflecting the government's intent to diversify growth drivers. Defence spending, up 11 per cent of GDP vs 8 per cent of the GDP in the previous year, underscores India's recognition of its strategic role in global geopolitics and its commitment to strengthening national security. 

 

From a macroeconomic perspective, the budget maintains a firm narrative. Capital expenditure remains anchored at 3.1 per cent of GDP for the fifth consecutive year, reinforcing the government's infrastructure-led growth strategy. Fiscal consolidation continues on course, with the deficit projected at 4.4 per cent for FY26 and 4.3 per cent for FY27. This gradual reduction in the debt-to-GDP ratio is critical, as it lowers the interest burden while sustaining nominal GDP growth at around 10 per cent. 

 

Borrowing figures -- gross at ₹17.2 trillion and net at ₹11.7 trillion -- are broadly in line with expectations, with small savings and an anticipated rise in Reserve Bank of India (RBI) dividends expected to bridge the gap. A notable shift is the aggressive disinvestment target, raised from ₹ 33,800 crore to ₹ 80,000 crore, signaling a stronger push toward "minimum government, maximum governance" and revenue mobilisation. 

 

For fixed income markets, the implications are nuanced. On one hand, the fiscal consolidation path and predictable borrowing program provide reassurance. On the other, structural challenges persist. The introduction of total return swaps is a welcome step toward deepening the bond market, but demand remains weak. Foreign portfolio investors have stayed cautious, deterred by higher yields in developed markets, geopolitical uncertainties, and the delay in India's inclusion in Bloomberg bond indices. Equity outflows have added pressure on the currency, compounding the challenges for fixed income investors.

 

In this environment, the strategy remains one of cautious accrual, with a barbell approach to balance risk and opportunity. Should index inclusion materialise in the second half of the year, duration strategies may open up, offering a window for reallocation. Until then, liquidity operations by the RBI will provide some support, but the broader fixed income outlook remains tethered to global dynamics as much as domestic policy.

 

Ultimately, the FY27 budget is less about immediate market excitement and more about charting India's long-term course. By resisting populist temptations and focusing on structural reforms, the government has signalled its intent to build resilience and competitiveness. 

 

For fixed income investors, the message is clear: India is staying on course, and while near-term pressures persist, the long-term trajectory remains firmly supported with robust macroeconomic fundamentals. 

   

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Disclaimer: Basant Bafna is Head - Fixed Income at Mirae Asset Mutual Funds (India). Views expressed are his own