Road to Budget 2026: Balancing growth, fiscal discipline, and relief for the middle class

As Finance Minister Nirmala Sitharaman prepares to unveil the Union Budget 2026-27 on Sunday, February 1, 2026, expectations are rising across industries for a policy framework that strikes a balance between fiscal discipline and rapid growth. With India’s economy projected to grow at 7.4% in 2025-26, this Budget is viewed as a pivotal step toward the "Viksit Bharat" 2047 vision.

Infrastructure and capital expenditure: To drive growth

Over the past few years, public capital expenditure has emerged as the primary source of economic growth. Higher provisions to roads, railways, ports, logistics and digital infrastructure have not only supported growth but also improved private investment sentiment.

Former RBI Governor Shaktikanta Das had reduced the GDP estimate for India in his last policy announcement in Oct 2024. To address the slowing economy, the last Budget (2025-26) and all the steps that the government took post-Budget were to spur consumption to drive the slowing economy; however, somehow, a capex-led drive was missing.

Markets will be eagerly watching the upcoming Budget to see if the government can keep up the pace of capital spending while keeping to its fiscal consolidation plan. The government's policy is expected to place a continued emphasis on infrastructure, notably urban transportation, renewable energy, and logistical efficiency.

Fiscal consolidation: Ensuring stability

Fiscal consolidation will remain a major focus. While boosting growth is vital, markets and rating agencies will closely monitor the government's commitment to decreasing the fiscal deficit. A credible glide path towards fiscal discipline, without abrupt spending cuts, would strengthen investor confidence and macroeconomic stability.

Taxation: Relief for the middle class

The salaried class and individual taxpayers are closely watching for potential updates to the tax regimes. Experts suggest the government may continue to favour the new income tax regime, as a result we may see phased withdrawal of the old regime over the next 2-3 years to simplify the system. Key demands include raising home loan tax deduction limits and adjusting tax slabs to reflect rising urban costs.

From a household perspective, tax relief for the middle class is a widely anticipated measure. Rationalisation of personal income tax slabs, higher standard deductions, and incentives for long-term savings could boost disposable incomes and consumption, especially in an environment where cost of living pressures have influenced household budgets. Simplification of tax compliance and reduction in litigation are also important expectations from both individuals and businesses. 

MSME support: Strengthening the backbone of the economy

India now is the world’s most populous country. In the total tax revenue of the government, the corporate taxation share is still lower than individual tax collections. India has a very large MSME segment, often described as the backbone of the Indian economy. The slowdown in the economy and current tariffs have impacted this segment severely.

This segment is expected to receive continued policy support through the Budget, as this can be a significant growth engine for India.  Easier access to credit, expansion of credit guarantee schemes, and targeted incentives for technology adoption and formalisation could help MSMEs enhance productivity and competitiveness. Special focus on women-led and rural enterprises would further promote inclusive growth.

Employment and skill development: Harnessing the demographic dividend

Another area of focus is employment generation and skill development. With India’s demographic dividend at a critical stage, greater allocation towards skilling programmes aligned with industry needs, apprenticeships, and emerging sectors such as artificial intelligence, green technologies and electronics manufacturing is essential.

Linking education outcomes with employability will be key to sustaining long-term growth. The overall unemployment in India remains at a higher level. In an era of AI challenging many jobs, in order to promote sustainable economic growth, this is expected to be the key focus area for the upcoming Budget.

Green growth: Transitioning to a low-carbon economy

The Budget is also expected to reinforce India’s commitment to green growth. Incentives for electric mobility, energy storage, green hydrogen, and climate-resilient infrastructure can support the transition to a low-carbon economy while creating new economic opportunities.

Strengthening urban local bodies and municipal finances

Urban local bodies and states may look for enhanced financial support and reforms to strengthen municipal finances. Measures promoting municipal bonds, improved accounting standards and capacity building can empower cities to meet growing infrastructure demands.

Foreign investment: Restoring confidence

Finally, India has seen very high FPI outflows in 2025 due to slowing growth, higher valuations and better investment opportunities outside India. While the prime focus of the Budget will be to address the slowing economy and various elements of growth, the focus could also be on ease of doing business for foreign investors and tax implications of their long-term gains specially for sovereign funds.

Conclusion

In essence, the forthcoming Budget is projected to be pragmatic rather than populist, with an emphasis on long-term economic health while also addressing current household and corporate issues. A Budget that balances growth, fiscal discipline, and inclusivity will be critical in guiding the Indian economy through global challenges and towards long-term development.

(Anita Gandhi is a Whole-time Director and Head of the Institutional Business at Arihant Capital.)