Budget 2026: Fiscal consolidation and incremental changes; no big bang reforms

Finance Minister Nirmala Sitharaman’s 2026 Budget is a continuation of the previous one, with a firm focus on fiscal consolidation rather than expansion, which many would have expected, given that the advance estimates for FY26, released a few weeks ago, showed ‘real’ GDP growth slipping from 8 per cent in the first half of FY26 (H1) to 7.4 per cent in the full fiscal (AE).

The growth of its main engine, consumption (Private Final Consumption Expenditure or PFCE), also fell from 7.5 per cent to 7.1 per cent.

Fiscal deficit is proposed to be brought down from 4.4 per cent of GDP in FY26 (RE) to 4.3 per cent and primary deficit from 0.8 per cent to 0.7 per cent. Debt is proposed to be cut from 56.1 per cent of GDP in FY26 (RE) to 55.6 per cent.

The FM may have also been constrained because growth in revenue receipt is estimated to fall from 10.1 per cent in FY26 (RE) over FY25 (actual) to 5.7 per cent in FY27 (BE). Revenue deficit remains at 1.5 per cent of GDP.

Also read: Budget 2026-27: Fiscal deficit estimated at 4.3 pc of GDP for FY27

The growth thrust continues to rely on government capex with the allocation rising from Rs 11.2 lakh crore in FY26 (BE) to Rs 12.2 lakh crore – a growth of 8.9 per cent. Other thrust areas include incentivising foreign investments, boosting manufacturing in new technology areas, deregulation and easing of tariffs and other incentives to boost exports – which are also continuation of the previous Budget’s thrust.

Defence allocation

It may come as a surprise that the defence allocation in terms of GDP has fallen from 1.6 per cent of GDP in FY26 (RE) to 1.5 per cent, although it is higher in absolute terms by Rs 0.2 lakh crore. In the backdrop of Operation Sindoor, the expectations were high that the defence allocation would see a quantum jump to boost domestic defence production and acquisition of fighter jets and weapons systems.

But this Budget would be better remembered for promising to make services exports a “core driver” of Viksit Bharat by raising its global share from 4.3 per cent to 10 per cent by 2047.

Also read: Operation Sindoor effect: Major hike in defence spending

Not just budgets, economic policies tend to ignore service exports despite them generating trade surpluses for more than a decade – reducing the net trade deficits.

The Budget proposes to do this by setting up a high-powered ‘Education to Employment and Enterprise’ Standing Committee to recommend measures that would prioritise areas to optimise the potential for growth, employment and exports. The committee will also look at the challenges emerging from artificial intelligence (AI), jobs and skill requirements.

Here are some of the key initiatives to attract foreign investments and ease trade barriers.

External challenges: FDI and trade

Having opened up foreign direct investment (FDI) in insurance from 74 per cent to 100 per cent a few months ago and exhausted its options, the Budget proposes raising the overall investment limits for Persons Resident Outside India (PROIs) scheme through the Portfolio Investment Scheme. For individuals, the limit is raised from 5 per cent to 10 per cent and the overall investment limit from 10 per cent to 24 per cent.

Also read: Budget 2026-27: How the government earns and spends every rupee

It proposes tax holiday till 2047 to “any” foreign company providing cloud services to customers globally by using data centre services from India; a safe harbour of 15 per cent on cost for a company providing data centre services from India is a related entity and exemption from income tax for 5 years to any non-resident who provides capital goods, equipment or tooling (third-party service provider).

Exemption is also proposed from Minimum Alternate Tax (MAT) to NRIs who pay tax on presumptive basis.

Tariffs

On the trade front, the Budget continued to dismantle tariff barriers it had erected since 2025 under US pressure. Yet, the Budget does not give a clear picture of the extent to which the tariff barriers have been removed. Some of these are aimed at the European Union (EU) with which India signed free trade agreement recently and also others that are awaited, including the US.

Those that aim to eliminate tariffs for the benefit of EU are duty exemptions on components and parts for civilian, training and other aircraft and on raw materials for the manufacturing of parts of aircraft required by the defence sector.

Also read: Budget 2026: Business as usual in a world that is not

Exemption for imports of goods needed for nuclear plants is proposed to be extended till 2035 and expand it to cover all nuclear plants, irrespective of capacity. Other such exemptions include inputs for processing seafood products for export, extending the exemption to capital goods for manufacturing lithium-ion batteries, inputs for manufacturing of solar glass, capital goods for processing critical minerals etc.

To help embattled exporters, a one-time concessional rate of duty is proposed to be offered to manufacturing units in SEZs to sell in the domestic market.

One surprise omission is no firm commitment to eliminate all the Quality Control Orders (QCOs) seen as much a hurdle for foreign exporters as for domestic exporters relying on imported raw materials and intermediaries. Some of the several hundred QCOs were withdrawn in the past few months.

Boosting income and consumption

As mentioned earlier, given the slowing growth and consumption demand in the full FY26, the Budget was expected to announce bold measures. But all it does is list a slew of schemes to boost farmers’ income and create jobs in the services sectors – particularly in health and education.

The impact of these would be limited given that allocations remain unspent year after year. For example, in the agriculture and allied sector, the allocation is up by Rs 3,833 crore over FY26 (BE) – far less than Rs 6,985 crore that was unspent in the FY26 (RE).

Also read: How Budget 2026-27 can revive consumption for inclusive growth

Similar is the case with rural development. The allocation may have gone up from the FY26 (BE) by Rs 7,291 crore, but it is far lower than the unspent amount of Rs 53,067 in FY26 (RE). These are long-term trends.

In these circumstances, the proposed support to high-value crops, such as coconut, sandalwood, cocoa and cashew in coastal areas and agar trees, almonds, walnuts and pine nuts in hilly regions and Self-Help Entrepreneur (SHE) Marts for women with financial support are mere additions to a large number of schemes with no specific allocations or blueprint in place.

Health and education

The allocations for health and education are no different.

In terms of GDP, allocations for both have remained stagnant over decades, which would explain why the Economic Surveys have stopped giving these data for the past few years. The current budget documents show, Rs 10,387 crore of the combined allocation remained unspent in FY26 (RE).

As for general households, there is no fresh tax incentives which was expected, given the massive reliefs announced in the last budget and the GST cut in September 2025. The focus this time is on easing procedures and decriminalise certain offences, like undisclosed incomes.

Also read: What does each state get from Budget 2026-27?

Those looking for incentives for small savings (bank deposits) would be disheartened as no such measures has been proposed. On the contrary, their investments in stock market now attract higher Securities Transaction Tax (STT) - on futures from 0.02 per cent to 0.05 percent; on options from 0.1 per cent to 0.15 per cent. This is aimed more at mobilising revenue, rather than discouraging investment.

The same is the case with the proposed tax on buyback for all types of shareholders as capital gains. Promoters will pay an additional buyback tax, making effective tax 22 per cent for corporate promoters; for non-corporate promoters the effective tax will be 30 per cent.

Signalling that its 2019 corporate tax cut (without exemptions and incentives) failed, the FM proposed “to encourage companies to shift to the new regime”, set-off of brought forward MAT credit is proposed to be allowed to companies only in the new regime (to an extent of one-fourth of the tax liability in the new regime). MAT is proposed to be made the final tax.

16th FC award pinches states

For states, the 16th Finance Commission recommendations, which the FM said the government had accepted, come as a disappointment. The devolution of tax share remains at 41 per cent (as was the case with the 15th FC).

Also read: Budget 2026: Govt accepts Finance Commission 16 recommendations

But more than that, the Commission’s grants to states – over and above the tax share of 41 per cent, which are given towards urban and rural local bodies and disaster management – have been lowered by Rs 23,556 crore from FY26 (RE).

These grants allocated to states were Rs 1.2 lakh crore in FY25, Rs 1.5 lakh crore in FY26 (RE) and is Rs 1.3 lakh crore for FY27 (BE).