Union Budget 2026: Navigating Geopolitical Noise for Economic Growth
Amidst the prevailing geopolitical turbulence, investors across India are directing their attention toward a monumental policy event—the Union Budget 2026 for the financial year 2026-2027 (FY27). Finance Minister Nirmala Sitharaman is scheduled to present this crucial budget on February 1, setting the tone for India's economic trajectory. Market participants widely expect the government to unveil strategic measures that can propel robust economic growth without compromising on fiscal prudence. The anticipation is particularly high for initiatives aimed at boosting consumption, supporting manufacturing sectors, and accelerating overall economic expansion. Financial markets are likely to respond positively to a budget that prioritizes structural growth over short-term populist measures, fostering long-term stability and investor confidence.
Five Critical Announcements Retail Investors Should Monitor
1. Government's Emphasis on Fiscal Consolidation
An intensified focus on fiscal consolidation is projected to yield long-term benefits for both the economy and financial markets. This approach is expected to enhance investor confidence, attract substantial foreign investments, improve sovereign credit ratings, and bolster currency stability. India has set ambitious targets to narrow the fiscal deficit and reduce central government debt to approximately 50% of gross domestic product (GDP) by FY31. Gaurav Bhandari, CEO of Monarch Networth Capital, emphasized, "From an investor’s perspective, the key focus areas in this Budget will be fiscal discipline, continuity in capital expenditure, and policy stability. Markets will closely watch the government’s commitment to its fiscal deficit roadmap, as that has a direct bearing on bond yields, currency stability, and overall sentiment."
2. The Capital Expenditure Roadmap
While fiscal consolidation remains paramount, government capital expenditure continues to be a pivotal driver of India's economic growth. Over recent years, sustained investments in infrastructure projects have significantly contributed to economic momentum. Gaurav Bhandari further noted, "Sustained capex allocation towards infrastructure, defence, power, and manufacturing remains critical for long-term growth." A consistent focus on these areas is anticipated to uplift market sentiment and support broader economic development.
3. Rationalization of Long-Term Capital Gains Tax
Investors are keenly awaiting stability in taxation policies, particularly concerning capital gains and personal taxes, as unexpected changes could impact investment flows. In the Union Budget 2024, the government elevated the long-term capital gains (LTCG) tax to 12.5%, while simultaneously raising the exemption limit to ₹1.25 lakh from ₹1 lakh. The market now anticipates further rationalization of LTCG tax and an increase in the exemption threshold. Mihir Tanna, Associate Director of Direct Tax at SK Patodia and Associate LLP, remarked, "If a person is selling equity based on mutual fund units after 5-7 years, ₹1.25 lakh tax exemption is a low threshold." Bhuvaneshwari A., Managing Director and CEO of SBICAP Securities, advocated for a calibrated approach, stating, "Rewarding longer holding periods with reduced tax rates incentivises financial discipline, broadens participation, and supports market stability. With the right thresholds, such a move can be revenue-neutral while structurally aligning household savings with India’s long-term growth."
4. Strategic Divestment Plans
The government's divestment initiatives are under scrutiny, as they hold the potential to reduce borrowing requirements and enhance systemic liquidity, thereby boosting market sentiment. Vinit Bolinjkar, Head of Research at Ventura, highlighted, "Government borrowing programs and PSU divestment targets (e.g., via stake sales in banks or energy firms) will influence liquidity. Strong divestment (potentially ₹50,000-60,000 crore) could reduce borrowing needs, supporting equity markets by freeing up capital." Effective execution of these plans could significantly alleviate fiscal pressures and attract investor interest.
5. Infrastructure Push and Job Creation
According to global investment bank Morgan Stanley, the government is likely to emphasize sustained capital expenditure to foster job creation, targeted social sector spending, and structural reforms. Major announcements in these domains would constitute a long-term positive for the economy. Vinit Bolinjkar elaborated, "Capital expenditure outlay, projected at ₹12-13 lakh crore (10-12% YoY growth), will drive multipliers in roads, railways, and urban infrastructure, benefiting related sectors, such as capital goods, infrastructure and power. This could also drive demand for other related stocks such as cement, steel and building materials."
Additional Investor-Specific Considerations
Beyond these five key areas, investors will also focus on other policy announcements. Vinit Bolinjkar pointed out that clarity on transfer pricing, safe harbour rules, and exemptions for IFSC units in GIFT City could attract more foreign direct investment (FDI) and foreign portfolio investment (FPI). Extensions of startup tax holidays to 2030 and Minimum Alternate Tax (MAT) exemptions for foreign firms might further stimulate venture capital inflows, enhancing India's appeal as an investment destination.
Investment Strategy Ahead of the Budget
The Indian stock market is experiencing heightened volatility in the lead-up to the Union Budget. Experts advise investors seeking safety and value to consider defensive strategies blended with strategic long-term positions. Santosh Meena, Head of Research at Swastika Investmart, identified large-cap private banks and select public sector undertakings (PSUs) as attractive value pockets. He stated, "Private lenders like HDFC Bank, Kotak Mahindra Bank, and Federal Bank have seen their valuations moderate significantly, offering a favourable entry point relative to their historical averages. Despite the recent pullback in broader markets, the structural story for PSUs remains intact; stocks like ONGC, BEL, and Hindustan Copper are compelling due to their alignment with energy security, defence indigenisation, and industrial demand."
Prashanth Tapse, Senior VP (Research) at Mehta Equities, recommended gradual accumulation in domestic growth and policy-backed sectors with high earnings visibility, relatively insulated from US tariff actions and volatile FII flows. He explained, "Segments such as infrastructure, capital goods, railways and defence continue to benefit from a strong government capex pipeline, multi-year order backlogs, and improving execution capabilities, providing confidence in medium-term revenue and margin sustainability." Tapse emphasized that balance sheet strength and order book quality should remain key selection criteria rather than thematic exposure alone. He cautioned, "Investors should remain cautious in the near term on export-oriented sectors, particularly those with high dependence on the US and global trade cycles. Tariff uncertainties, potential demand moderation, and pricing pressures could weigh on earnings visibility, making risk-reward less favourable until there is greater clarity on global growth and trade policy direction."
As the Union Budget 2026 approaches, stakeholders across the financial spectrum await decisive policy directions that could shape India's economic landscape for years to come, balancing growth aspirations with fiscal responsibility.
