The forthcoming Union Budget, scheduled for presentation on 1 February 2026, arrives at a critical juncture for the Indian economy. Despite facing geopolitical tensions and external trade challenges, India has demonstrated resilience with robust GDP growth in 2025. This performance has been bolstered by significant monetary easing, including policy rate cuts and liquidity measures, which have facilitated credit flow and sustained consumption. Additionally, fiscal interventions such as personal income tax relief and GST rate reductions have provided further stimulus.
Corporate Capex and Financial Health
A vibrant domestic economy, combined with aggressive government-led infrastructure initiatives and high capacity utilization across sectors, has created a conducive environment for corporate capital expenditure. Listed companies have notably accelerated their investment activities. For instance, the capex of a sample of 1,600 non-financial entities has grown at a compound annual growth rate of approximately 9% over the past decade in nominal terms. Following a pandemic-induced slowdown, investments have rebounded sharply, with cumulative capex during FY2023 to FY2025 surging nearly 60% compared to the pre-COVID period of FY2018 to FY2020.
Strengthened Corporate Balance Sheets
Corporate financial health has improved markedly over the last ten years. The total debt-to-OPBDITA ratio has strengthened to 2.1x as of March 2025, down from 3.4x in March 2016. Liquidity positions have also fortified, with cash and current investments now constituting 46% of total debt, a significant increase from 32% a decade ago. Remarkably, cash reserves have averaged nearly double the annual capex, providing companies with ample flexibility to scale operations without financial strain.
Banking Sector and Financing Landscape
The banking sector is in a robust position to support the next phase of domestic investment. Banks are well-capitalized, and gross non-performing assets have reached historic lows. This stability enables them to effectively finance the ongoing investment cycle. Bond markets continue to serve as a complementary source of funding, although their depth remains constrained to highly rated issuers, limiting broader access.
Public Capex Imperatives
Given this context, the Union Budget for FY27 must intensify its focus on public capital expenditure. A double-digit increase in the capex target is essential to bolster the country's capital stock and potential growth, potentially offsetting any weaknesses in corporate capex. More critically, the scope of public capex requires expansion. Currently, a significant portion of government capital spending is concentrated on railways, highways, roads, and defence, which have seen substantial growth post-COVID, partly due to on-budgeting strategies.
The next wave of public investment should adopt a more localized approach, addressing critical areas such as water supply, sanitation, public transport, irrigation, healthcare, and education. Many of these sectors fall under state government jurisdiction. The central government can stimulate progress by substantially enhancing the scheme for special assistance to states for capital investment, which was allocated ₹1.5 trillion in FY26. This scheme provides 50-year interest-free loans to state governments for capex purposes.
Production-Linked Incentive Schemes
The Budget should also significantly increase outlays for incentive disbursements under the Production-Linked Incentive schemes. While these initiatives have faced operational delays and limited success thus far, capex has begun to rise in certain sectors, and production is expected to gain momentum. Addressing sector-specific challenges could accelerate India's manufacturing growth in the near term.
Containing Borrowing Costs
Equally important is the need to manage borrowing costs by restraining the fiscal deficit and market borrowings in FY27. This measure is crucial to prevent crowding out the private sector. According to assessments, the Centre is likely to target a fiscal deficit of 4.3% of GDP in FY27, slightly lower than the 4.4% estimated for FY26. While this may contain net market borrowings, gross borrowings could rise significantly due to increased redemptions. The government must ensure this increase is moderated to reassure bond markets, especially given the persistent stickiness in government security yields despite ongoing monetary easing.
In summary, the Union Budget 2026 holds the key to sustaining India's economic momentum by prioritizing localized public capex, enhancing PLI schemes, and prudently managing fiscal parameters to keep borrowing costs in check.
