Budget 2026: Navigating Global Headwinds with Strategic Capex Focus
As the Union Budget 2026 is poised for presentation in Parliament by Union Finance Minister Nirmala Sitharaman on Sunday, February 1, market sentiment remains cautiously optimistic. Investors are primarily anticipating policy continuity rather than expecting dramatic, headline-grabbing reforms. This measured outlook reflects a broader economic environment where stability is prized amidst increasing global uncertainties.
Global Landscape Shifts: Protectionism and Its Impact
Since the last Union Budget, the international economic scenario has deteriorated significantly. A key factor driving this shift is the rise in protectionist policies, notably following US President Donald Trump's announcement of substantial tariffs on multiple nations. This includes a particularly steep 50% higher tariff imposed on India, a move that has disrupted a global economic order that had remained relatively stable for decades.
While recent domestic measures—such as tax cuts, exemptions for individual taxpayers, and the rationalization of GST rates—have yet to fully manifest their economic impact, analysts project that the upcoming budget will gradually steer towards a more balanced growth framework. This approach aims to support both capital expenditure and consumption while steadfastly maintaining fiscal discipline.
Capex: The Cornerstone of Budget Strategy
Domestic brokerage firm Motilal Oswal anticipates that the FY27 Union Budget's strategy for stimulating consumption will be selective and targeted. Consequently, the budget is expected to continue prioritizing capital expenditure, especially in sectors deemed strategically vital given the current geopolitical pressures.
Fiscal consolidation and capital investment have been dominant themes in recent Union Budgets. The central government has made significant strides in reducing its fiscal deficit, from 9.2% of GDP in FY21 to an estimated 4.4% in FY26. Simultaneously, allocations towards capital expenditure have surged dramatically—from ₹1.9 trillion in FY14 to ₹11.2 trillion in FY26. As a percentage of GDP, capex allocation reached a peak of 3.1% in FY25, a substantial increase from 1.6% in FY18, according to data from JM Financial.
However, the pace of capex allocation has moderated since FY25, as the government has begun to shift some attention towards boosting consumption demand within the economy.
Balancing Act: Capex vs. Consumption
Motilal Oswal expects Finance Minister Nirmala Sitharaman to strike an optimal balance between consumption and capital expenditure. The brokerage highlights that capital expenditure offers a higher multiplier effect, typically ranging from 1.5 to 3 times. This means that every ₹1 spent on capex can potentially lift GDP by up to ₹3, with durable, long-term benefits. In contrast, revenue expenditure primarily boosts consumption in the short term.
Anand Rathi shares a similar perspective, anticipating that the government will balance gradual fiscal consolidation with a continued emphasis on capital expenditure, manufacturing incentives, and ease of doing business, all while keeping revenue expenditure under control.
Meanwhile, Axis Securities suggests that the budget is likely to further strengthen the long-term vision of Viksit Bharat @2047. This initiative builds on the structural transformations achieved over the past decade and aims to lay a solid foundation for durable, inclusive, and investment-led growth in the coming years.
Brokerage Projections: Capex Holding Above 3% of GDP
Anand Rathi projects that the government will maintain its capex-to-GDP ratio at approximately 3.2%, with absolute capital expenditure rising about 13% year-on-year to nearly ₹12.6 trillion. Capex is expected to remain the primary growth lever, with allocations heavily concentrated in several key sectors:
- Defence: With a strong emphasis on indigenization.
- Railways and Logistics: Enhancing transportation networks.
- Roads and Highways: Improving infrastructure connectivity.
- Telecom and Digital Infrastructure: Boosting technological advancement.
- Long-term Capex Loans to States: Supporting regional development.
Axis Securities echoes this sentiment, stating that capital expenditure remains the cornerstone of India's growth strategy. The brokerage expects the Union Budget 2026–27 to allocate between ₹12 and ₹13 trillion towards capex, implying a 10–15% year-on-year increase. Key focus areas are likely to include:
- Roads, railways, and logistics infrastructure.
- Defence and indigenisation of equipment.
- Urban infrastructure and housing.
- Power transmission, renewables, and green energy.
JM Financial adds a note of caution, suggesting that any reduction in capex due to fiscal constraints should not allow spending to fall below 3% of GDP, as such a decline could adversely affect economic growth.
Motilal Oswal further expects the budget to place greater emphasis on capital expenditure, particularly in sectors considered strategically important amid prevailing geopolitical compulsions. The brokerage anticipates higher allocations for defence, critical minerals, power, electronics, infrastructure, and stronger growth in affordable housing.
Disclaimer: Investors are advised to consult with certified experts before making any investment decisions.
