With the Union Budget for February 2026 on the horizon, India stands at a critical economic juncture. The central question for policymakers is whether the fiscal blueprint will prioritize short-term fiscal consolidation or lay the groundwork for a sustainable, high-growth trajectory. The ambitious goal is to achieve a real GDP growth rate exceeding 7% in the financial year 2027.
A Potential Historic Shift in Fiscal Focus
Analysts believe the upcoming budget could mark a historic departure. Instead of rigidly adhering to fiscal deficit targets, the government might pivot towards managing the broader debt-to-GDP ratio. This strategic shift could create vital fiscal space for increased public spending, essential for stimulating the economy amidst global uncertainties.
The government and the Reserve Bank of India (RBI) have already taken significant steps over the past year to spur consumption. These include income tax cuts, revisions in GST rates, and a substantial 100 basis point repo rate cut in calendar year 2025. The 2026-2027 budget is expected to intensify these efforts further.
Simplifying Taxes to Boost Household Spending
A major reform anticipated in the budget is the overhaul of the personal income tax system through the introduction of a simplified Tax Deducted at Source (TDS) mechanism. The current system, with its varying TDS rates and multiple thresholds, often leads to disputes and complicates compliance for taxpayers.
The budget is likely to propose lower, standardized rates and a clearer threshold structure. This move will not only ease the compliance burden but, more importantly, increase take-home salaries for millions, providing a direct and powerful boost to household consumption. This reform's impact will be amplified by the implementation of the 8th Pay Commission recommendations, expected from January 2026, which will benefit around 5 million government employees and over 6.5 million pensioners.
Strengthening the Pillars of Manufacturing
While consumption is crucial, it alone cannot secure long-term growth. India must simultaneously strengthen its manufacturing base. Data from the second quarter of FY26 showed manufacturing surging at 9.1% year-on-year. However, several key sectors are under pressure.
Industries such as MSMEs, textiles, automobiles, jewellery, and shrimp exports are grappling with tariff disruptions and export headwinds. In response, the budget is expected to roll out targeted tax relief measures for these affected sectors. Additionally, the government could provide partial support through credit guarantee schemes, a move designed to preserve jobs and maintain industrial output during a challenging period.
Reforms in Banking and Capital Markets
A third pillar for broadening India's growth prospects lies in the financial sector. The budget must first commit to regulatory stability for capital markets. Recent rapid regulatory shifts have forced brokerage firms and asset management companies (AMCs) to repeatedly redesign their business plans, creating uncertainty. Providing certainty to derivative markets, mutual funds, and distribution networks is vital for sustaining retail and institutional participation.
Second, the government's agenda should include expediting the strategic disinvestment of select public sector banks. This can be complemented by aligning the retirement norms for public sector unit (PSU) management with private sector standards and introducing performance-linked Employee Stock Ownership Plans (ESOPs) in PSU banks to drive efficiency and accountability.
In summary, if the Union Budget 2026-27 successfully combines a simplified TDS regime to boost consumption, targeted support for stressed manufacturing sectors, and foundational reforms in banking and capital markets, it can deliver a dual benefit. This approach can revive immediate demand while building a strong, trust-based foundation for India's long-term, sustainable economic growth.
