Key Takeaways
- You’ll see why a 7.4% GDP forecast can still leave the government short of revenue.
- Defense and public‑capex hikes could lift specific sectors despite a stagnant tax relief agenda.
- Corporate earnings momentum has stalled; valuations are now stretched.
- Expect limited income‑tax concessions; LTCG changes are the only realistic relief.
- Fiscal consolidation will shift from deficit‑to‑GDP to debt‑to‑GDP targets after FY27.
You’re about to discover why India’s 2026 budget may ignite a market rally—or trap you in hidden taxes.
Why the 2026 Budget’s Growth Forecast Beats Global Peers
India is projected to grow at 7.4% in FY26, an impressive number when the world is wrestling with post‑pandemic recovery and geopolitical headwinds. The average annual growth from FY22‑26 is calculated at 8.1%, buoyed by a low base effect from FY20‑21. While the United States and Europe are wrestling with sub‑5% growth, India’s demographic dividend, expanding middle class, and resilient export basket keep the economy on a high‑gear trajectory.
Two macro forces underpin this outlook: a relatively contained fiscal deficit (4.5% of GDP in FY25) and a manageable current‑account gap. The RBI’s cumulative 125 basis‑point rate cuts in 2025 also lowered borrowing costs, feeding private consumption and capex. However, nominal growth is expected to sit at 8.2%—well below the 10.1% target—because inflation remains modest, which paradoxically drags real‑term revenue growth.
How the Decline in Corporate Earnings Alters Valuations
From FY21‑24, corporate earnings surged at a 24% CAGR, but FY25 saw that momentum tumble to a modest 5% gain. The slowdown stems from three factors:
- AI‑driven hype in 2025 inflated valuations, creating a correction in 2026.
- Foreign Institutional Investors (FIIs) dumped $18 billion, forcing prices lower.
- Higher input costs and tighter credit conditions after the RBI’s rate cuts faded.
Result: market multiples are now at historically elevated levels, leaving little room for error. Investors should scrutinize earnings quality, free‑cash‑flow conversion, and balance‑sheet health before chasing growth stories.
What the Defense and Infrastructure Spend Means for Sector Plays
Geopolitical tension and the lingering “Operation Sindoor” scenario push the defense outlay up by more than 20% in the upcoming budget. This translates into a clear tailwind for Indian defence manufacturers, aerospace firms, and ancillary suppliers. Simultaneously, the government pledges to sustain public capex despite revenue constraints, benefitting infrastructure developers, construction conglomerates, and renewable‑energy players.
Historically, a defense‑spend boost of this magnitude has lifted the NIFTY Defence Index by 12‑15% over the subsequent 12‑18 months. Infrastructure projects, especially those linked to highways and ports, have shown a 9% rally in the same window.
Tax Relief Prospects: Reality Check for Investors
Calls for broader tax relief are echoing across the market, but the budget’s fiscal reality limits what the Finance Minister can deliver. The 2025 increase of the personal income‑tax exemption to ₹12 lakh already shelters earnings up to five times the per‑capita income (₹2.4 lakh). Further hikes would erode the progressive tax base.
Corporate tax rates remain unchanged, and the long‑term capital gains (LTCG) tax, set at 12.5% across asset classes, is unlikely to be abolished. The only plausible tweak is raising the LTCG exemption ceiling above the current ₹1.25 lakh, which would modestly improve after‑tax returns for high‑net‑worth investors.
Because eliminating LTCG for FIIs would require scrapping the tax entirely—a politically sensitive move—investors should temper expectations of a sweeping tax‑relief package.
Fiscal Discipline and Debt Targets: Long‑Term Implications
The NDA government has trimmed the fiscal deficit from 9.2% of GDP in FY21 to 4.5% in FY25. The FY27 target of 4.3% signals continuity, but the real shift arrives when the metric changes from deficit‑to‑GDP to debt‑to‑GDP. The stated goal: bring debt‑to‑GDP from 55.5% down to 50% by 2030.
This transition implies a tighter fiscal envelope for discretionary spending, but it also signals to sovereign‑rating agencies that the debt trajectory is under control—potentially stabilising India’s credit rating and lowering sovereign yields.
Investor Playbook: Bull vs. Bear Cases
Bull Case: If the budget delivers a credible defense‑spend surge, sustains public capex, and keeps fiscal consolidation on track, sector‑specific ETFs (defence, infrastructure, renewable energy) could outpace the broader market by 8‑10% over the next 12 months. A modest rise in the LTCG exemption ceiling would add a small tax‑efficiency boost for high‑income investors.
Bear Case: Should corporate earnings continue to falter, valuations stay stretched, and tax relief remain flat, equity markets could face a correction of 12‑15% as risk‑averse capital re‑allocates to global safe‑haven assets. The lingering US‑India trade impasse and persistent 50% US tariffs could further dent export‑driven sectors.
Bottom line: Align your exposure to the budget’s clear winners—defence, infrastructure, and selective growth‑oriented stocks—while maintaining a defensive cushion (short‑duration bonds or cash) to weather any post‑budget volatility.