This year’s Union Budget is being presented at a moment of unprecedented global unrest. The global economy is being shaped by tariffs, trade wars and political turmoil. Supply chains are fragile, geopolitics is intrusive, and economic nationalism is back in fashion.
Yet, amidst this global unease, it is indeed a great relief to see that India finds itself in a relatively stable position. Inflation is low, growth is improving, high-frequency data is very promising, and macroeconomic indicators remain largely under control. That stability gives the government plenty of room to act, but it also puts a responsibility on us to act wisely.
It is heartening to note that the central question ahead of Budget 2026 is no longer how to save the economy from crisis. Thankfully, that era has passed. The question now is how to lead India towards sustained, high-quality growth without losing broader discipline. In many ways, this is a much better problem.
I come from the markets and interact with industry leaders, exporters and investors on a daily basis. There is broad agreement among economists and market participants on one key point: the massive stimulus action has already been taken by the Modi government. The economy now needs patience, reforms and better coordination, especially between the Center and the states. In my view, Budget 2026 should reflect this change in mindset.
Budget 2025 was a defining policy moment. Without waiting for a crisis, the government introduced a strong mix of structural reforms, fiscal support and monetary easing. Capital expenditure was protected, GST was rationalized and tax relief was given with a focus on accelerating growth. The Reserve Bank eased liquidity and reduced interest rates significantly. Overall, these actions amounted to a massive and pre-emptive stimulus.
Slowly but steadily results have started appearing. Domestic demand is gradually improving. Consumption is becoming stable due to improvement in purchasing power. Labor market conditions are better than a year ago. Development is gaining momentum, albeit unevenly. This is why there is no need for a second round of big stimulus. The economy needs time to fully implement the measures already announced.
Equally important is the fact that the government demonstrated fiscal discipline while supporting growth. Despite the supportive stance, it remained committed to consolidation. That credibility matters. This has helped stabilize inflation expectations and investor confidence.
Budget 2026 should be based on this foundation. In my view, the broad direction is clear: fiscal discipline must be preserved. The fiscal deficit target of about 4.2 percent of GDP, about 20 basis points lower than last year, will put India on track to gradually reduce public debt to 50 percent of GDP and bring the deficit closer to 3 percent by the end of the decade. This is not about ratings or optics, but about achieving long-term financial stability and policy credibility.
My guess is that growth next year is expected to be driven primarily by domestic demand, not exports. India’s GDP growth in fiscal year 2027 is expected to average around 7 percent. Inflation is expected to remain close to the RBI’s 4 percent target, providing the desired flexibility to policymakers. The current account deficit, supported by services exports and remittances, remains manageable, even as trade uncertainty with the US remains. We cannot become prisoners of the whims and fancies of the American administration
The market is being cautious regarding the budget. Budget-day volatility has declined over time, but expectations still matter. A budget that avoids excessive fiscal tightening, protects capital expenditure and signals continuation of reforms could surprise positively.
One of the most important structural challenges that Budget 2026 should address is the growing imbalance between equity and debt financing in India’s economy. There has been a rapid change in household savings behaviour. The younger generation is saving less. A large portion of savings are going into physical assets like real estate and gold. Within financial savings, equity investment has grown rapidly.
This is not a bad development in itself. A vibrant equity culture is healthy. But relying too heavily on equity while ignoring debt is risky at this stage of India’s development. I believe a better balance between debt and equity will strengthen the financial system in three important ways.
First, stronger bank deposits will improve the financial stability of banks. This is important to support the next credit cycle. Second, companies, especially MSMEs, rely more on credit than equity. Excessive reliance on equity financing limits their growth options. Third, strong domestic savings in deposits help the government meet its borrowing needs internally, thereby reducing dependence on foreign capital. This directly supports Prime Minister Narendra Modi’s goal of economic self-reliance.
Two policy steps can help correct this imbalance. The first is to gradually reduce the large tax gap between equity and debt investments. Today, equities enjoy significant tax benefits. This discourages households from investing in debt products. More balanced tax treatment would make fixed income investing attractive again.
The second is to expand the range of loan products and allow greater flexibility for global investment. This will reduce pressure on domestic equity valuations, attract foreign capital and strengthen the balance of payments. Strong capital inflows support the currency, bank deposits and overall financial stability.
Another underappreciated issue is state-level reforms. The central government has done a lot to boost manufacturing and infrastructure, but unless states take action, growth cannot accelerate uniformly. Some states are showing the way. Uttar Pradesh, Maharashtra, Andhra Pradesh and Telangana have taken important steps.
Electricity reforms by some states are a strong example of this. By restructuring how it provided free electricity to farmers, government schools and low-income families, the state improved the financial health of its power distribution companies. This creates room for lower industrial tariffs, making manufacturing more viable and increasing the potential for job creation.
Similarly, some states like Maharashtra have introduced simple administrative reforms like allowing shops to operate 24×7 and relaxing labor hour norms, which is bringing a huge economic impact. These are state subjects. All states can implement these without political cost. The idea that reforms automatically lead to electoral defeat has become increasingly outdated. What matters is design and communication.
Despite record gross FDI inflows, India faces balance of payments challenges. The reason for this is huge capital outflow. Foreign investors are booking profits and withdrawing money. In recent years, FDI outflows and foreign portfolio sales have combined to exceed $90 billion annually.
This is not necessarily bad. This reflects the fact that investors are making money in India. But this creates pressure. Taxing outflows would be a serious mistake. This will scare the inflow. Therefore, we should not even think about taxing outflows
The solution lies in encouraging long-term investment and diversifying the capital pool. Simplifying taxation in GIFT cities, making capital gains tax zero for investments coming through GIFT cities, fixing buyback taxation and widening the foreign investor base could help offset the outflows.
In this context, we need to pay attention to the recent judgment of the Supreme Court in the Tiger Global case. While this decision strengthens tax fairness and the principle of substance over form, it has also created uneasiness among global investors regarding retrospective interpretation and tax certainty. Left unchecked, such concerns can gradually weigh on investment sentiment. It is therefore important for the government to respond proactively, through clear legislation and transparent regulations, to ensure that tax enforcement does not inadvertently undermine India’s growth ambitions.
Looking to the future, most experts agree that the next phase of public capital expenditure should focus on manufacturing and urban infrastructure. India has invested heavily in highways and railways. The next growth driver will be urban roads, ring roads, housing and city infrastructure.
Targeted industrial support similar to PLI, but focused on domestic manufacturing rather than just exports, could help. Selective subsidies, such as for semiconductors, demonstrate how focused support can work. Besides, recurring expenses will also have to be controlled. Subsidies, salaries and pensions should grow slower than nominal GDP to maintain fiscal discipline.
Ultimately, Budget 2026 should not be about dramatic announcements. It should be about follow-through. The government has already done a lot of work on consumption and incentives. The priority now is manufacturing, capital expenditure and structural reforms.
Also, better centre-state coordination will be important. Correcting the debt-equity imbalance will be essential for financial stability. Managing capital flows wisely will protect macro stability.
If Budget 2026 gets these fundamentals right, the market may respond positively. More importantly, it will lay the foundation for sustained growth over the next decade and take India closer to its long-term goal and the Prime Minister’s vision of becoming a developed economy by 2047.
Syed Zafar Islam is the national spokesperson of BJP and former managing director of Deutsche Bank. Views expressed are personal
