- Infrastructure spending is set to accelerate, creating multi‑sector tailwinds.
- Defence allocation rise could lift major manufacturers and the broader industrial base.
- Flexi‑cap funds are positioned to capture growth across large, mid and small caps.
- Small‑cap earnings are projected to surge 8‑10% YoY over the next 4‑6 quarters.
- Geopolitical tension and potential capital‑gains tax reforms remain the top downside risks.
You’re about to miss the biggest market catalyst of 2026 if you ignore the new budget.
Why the 2026 Infrastructure Push Is a Tailwind for Indian Equities
Varun Goel, senior fund manager at Mirae Asset, says the Union Budget will double‑down on roads, railways and green energy. This isn’t a one‑off stimulus; it’s a structural shift. Capital spending (capex) directly fuels corporate revenue pipelines – think of construction firms, cement producers, steel makers and equipment suppliers. When the government earmarks billions for highways, each kilometer of road translates into contracts worth crores for these downstream players.
Historically, India’s 2014‑16 fiscal surge in infrastructure coincided with a 12% average uplift in the NIFTY Infrastructure index. The same pattern repeats when policy aligns with long‑term demand, making the 2026 budget a likely catalyst for a broad equity rally.
Sector Deep‑Dive: Roads, Railways, Green Energy – Winners and Losers
Roads & Highways: Companies like L&T, Dilip Buildcon and Adani Enterprises stand to win new EPC (Engineering‑Procurement‑Construction) contracts. Their order‑books are already expanding, and a 5‑7% YoY increase in highway spending could lift earnings multiples by 0.3‑0.5 points.
Railways: With the government targeting a 20% increase in railway capex, rolling stock manufacturers (e.g., Bharat Earth Movers) and signaling tech firms could see revenue spikes. Watch for a shift from legacy diesel to electric locomotives, which benefits renewable‑focused OEMs.
Green Energy: Solar and wind capex is set to climb as India pursues its 450 GW renewable target. Long‑term growth drivers include the Production‑Linked Incentive (PLI) scheme for solar modules and the accelerated de‑listing of coal‑based plants. Companies like Adani Green, Tata Power and renewables‑focused NBFCs are positioned to compound.
Defence Allocation Surge: How Tata, Larsen & Toubro Could Benefit
The budget’s defence outlay bump is modest in absolute terms but strategically important. Domestic content requirements are tightening, meaning Indian OEMs will capture a larger slice of the ₹2.5 lakh crore defence spend over the next decade. Tata Advanced Systems and L&T Defence, both already partners on projects like the Tejas fighter and indigenous naval vessels, could see order‑book inflows of 8‑10% YoY.
Investors should monitor the “Make in India” defence push, as it often precedes a wave of ancillary contracts for precision engineering, electronics and logistics firms – a classic ripple effect.
Small‑Cap Rebound: The Four‑to‑Six‑Quarter Earnings Play
Goel forecasts an 8‑10% earnings growth for Q3, driven by double‑digit gains in auto, NBFCs and metals. Small‑cap indices, which historically lag large caps during macro headwinds, are poised for a sharp correction. In the post‑2019 slowdown, the NIFTY Small‑Cap rallied 45% in 12 months once the VIX (volatility index) fell below 20 – a pattern likely to repeat.
Key definition: Flexi‑cap funds dynamically allocate assets across market caps, allowing investors to capture small‑cap upside while staying anchored in large‑cap stability. This flexibility is crucial when volatility creates “attractive entry points” for smaller stocks.
Flexi‑Cap Funds – The One‑Stop Vehicle for Volatile Markets
Why are inflows surging? Flexi‑cap funds blend diversification with growth potential. They can tilt toward mid‑caps when earnings momentum builds, then swing to large‑caps for defensive cushioning. The result is a smoother risk‑adjusted return profile, especially valuable in a market where geopolitical shocks can swing sentiment overnight.
Data from the past two fiscal years shows flexi‑cap assets under management grew at a CAGR of 22%, outpacing pure large‑cap funds by 8 percentage points. For a medium‑term investor, this class offers a “single‑fund solution” to capture the broad-based upside Goel outlines.
Risks to Watch: Geopolitical Tension and Capital‑Gains Tax Rationalisation
Even a bullish macro story can be derailed. Geopolitical flashpoints—whether trade blockades in the Middle East or energy supply shocks—have a direct impact on commodity prices and, consequently, on Indian exporters and import‑dependent manufacturers.
On the tax front, any move to rationalise capital‑gains tax or Securities Transaction Tax (STT) could compress after‑tax returns for high‑turnover traders. While a lower STT benefits retail participation, a higher capital‑gains rate could dampen institutional appetite for equities.
Investor Playbook: Bull vs Bear Cases and Tactical Entry Points
Bull Case: If the budget delivers the promised capex, and global risk premium narrows, we could see a 12‑15% rally in the NIFTY 50 by FY27. Small‑caps could outpace large caps by 2‑3% annually, driven by earnings acceleration in auto, NBFCs and metals.
Bear Case: A sudden escalation in global trade tensions or an unexpected hike in capital‑gains tax could stall earnings momentum. In that scenario, large‑cap defensive stocks (e.g., IT services, FMCG) would act as a cushion, while small‑caps could underperform by 5‑7%.
Action Steps:
- Allocate 45‑50% to a high‑quality flexi‑cap fund with a proven track record of dynamic rebalancing.
- Reserve 20‑25% for sector‑specific ETFs or stocks in roads, railways, green energy and defence.
- Deploy 15‑20% into select small‑cap leaders in auto components, NBFCs and metal fabricators to capture the earnings rebound.
- Maintain a 5‑10% cash buffer to opportunistically buy on any market pull‑back triggered by geopolitical news.
By aligning your portfolio with the budget’s structural reforms while hedging against downside surprises, you position yourself to ride the next wave of India’s growth story.