Union Budget 2026 places the services sector at the forefront of its growth agenda. With a clear emphasis on employment generation, the government has introduced a range of initiatives targeting tourism, digital media, health care and education. This move reflects the Centre’s ambition to capture 10% of the global services market by 2047, up from the current 4.3%, and to leverage India’s demographic dividend through structured job creation.
These initiatives reinforce investor confidence that the government is addressing its employment challenge proactively, which is crucial for sustaining the country's consumption and growing per-capita income levels.
Fiscal prudence remains a cornerstone of the Budget, with the fiscal deficit for 2026–27 pegged at 4.3% of GDP, down from 4.4% in 2025–26. This consolidation is achieved without compromising on growth-oriented spending, supported by buoyant tax revenues and a stable macroeconomic environment. The government will benefit from the direct tax revenues (11.4% year on year) that are expected to grow faster than the nominal GDP growth led by personal income tax collections (11.7% YoY) and corporate tax (11% YoY) growth.
3 February 2026
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As indicated last year, the government moved towards a new debt framework targeting its debt-to-GDP target of 50% ±1% by 2030–31. Accordingly, the debt-to-GDP is budgeted to narrow to 55.6% as per 2026–27 from 56.1% estimated in 2025–26.
"For investors, this Budget offers policy continuity, macro stability and a clear signal of the intent to build a future-ready, employment-rich economy"
No Disruption
Importantly, the Budget maintains stability in capital gains and equity taxation, avoiding any disruptive changes. A modest increase in securities transaction tax (STT) on derivatives trading was announced, but this is unlikely to significantly impact long-term investors. The government has also introduced a simplified dispute-resolution mechanism, allowing taxpayers to settle cases by paying an additional amount in lieu of penalties.
The Budget also reinforces its commitment to infrastructure-led growth, with a record capital expenditure outlay of ₹12.2 lakh crore for 2026–27, up 11.5% YoY. Investments in high-speed rail corridors, logistics parks and urban development are aimed at reducing logistics costs and enhancing export competitiveness.
Defence capex received an 18% hike in allocation, with a focus on domestic procurement and modernisation. Production-linked incentive (PLI) schemes continue to receive strong support, particularly in electronics, semiconductors, electric vehicles and renewable energy. Exempting raw materials for aircraft parts from customs duties should help companies manufacturing civilian and defence aircraft.
The launch of India Semiconductor Mission 2.0, with a ₹40,000 crore allocation, signals a long-term vision to build a resilient chip ecosystem and reduce import dependence.
Measures & Impact
Several targeted measures will aid the growth in the nation’s financial infrastructure. A ₹10,000-crore growth fund for small and medium enterprises and expanded credit guarantees aim to strengthen balance sheets of micro, small and medium enterprises and improve their credit access. The Budget also incentivises municipal bond issuances with a ₹100-crore reward for cities issuing bonds above ₹1,000 crore, encouraging market-based urban financing.
The Centre has consolidated India’s positioning for global technology investments with the 20-year tax holiday for foreign companies providing cloud services via Indian data centres. It is a bold step to attract global tech investment. Complementing this, the safe harbour margin for information-technology services has been standardised at 15.5%, with the threshold expanded to ₹2,000 crore, simplifying transfer pricing compliance and boosting India’s appeal as a hub for global capability centres.
Overall, Union Budget 2026 reinforces India’s growth narrative with a pragmatic approach guiding through a blend of structural reforms, targeted incentives and fiscal discipline.
Key sectors poised to benefit include electronics, semiconductors, pharmaceuticals, services, infrastructure and capital goods.
For investors, the Union Budget offers policy continuity, macroeconomic stability and a clear signal of the government’s intent to build a future-ready, employment-rich economy.
While execution remains critical, the direction is clear: India is betting on its human capital and strategic sectors to drive sustainable growth and market returns for investors.
(The writer is managing director, Kotak Mahindra Asset Management Company)
