Budget Preview and Private Investment Incentives: What Has Worked and What Hasn’t a Year Later

India’s Union Budget 2026 is all set to be announced on February 1st, and private investors and experts are reassessing the effectiveness of incentives rolled out in last year’s edition, particularly against the government’s objective of sustaining growth while adhering to fiscal consolidation.

Budget 2025 reinforced a capital-led growth rulebook, prioritised public capex, manufacturing-linked incentives, and long-term innovation financing. This was supposed to act as a lever to rope in private investment rather than relying on broad fiscal stimulus.

In numeric terms, the approach has been steady but measured. Capex in FY25 was budgeted at over INR 11 lakh crore, which was close to a threefold increase compared to pre-pandemic levels. This sustained capex push has supported private investment sentiment, with gross fixed capital formation hovering above 30 per cent of the nation’s GDP, which is among the highest levels seen in over a decade.

Market experts note that fiscal discipline has remained intact. India’s fiscal deficit for FY25 was contained close to the 5 per cent of GDP mark, while inflation averaged within the RBI’s tolerance band for much of the year, supporting macro stability.

According to Motilal Oswal Financial Services’ pre-budget preview report, it does not expect populist measures or large tax giveaways, given the ongoing fiscal consolidation agenda.

“No direct tax code changes expected this year (unlike earlier expectations around income tax/GST reforms),” said Motilal Oswal in its report.

The restraint has been positively received by institutional investors, particularly FPIs and PE funds, which have increasingly prioritised policy predictability over short-term relief.

Consumption trends, however, present a more nuanced picture. While urban discretionary spending and premium consumption categories have shown resilience, rural demand recovery has lagged, limiting broader-based private investment expansion. Private final consumption expenditure growth moderated to mid-single digits in real terms over the past year, prompting investors to look for calibrated demand-side support rather than blanket stimulus.

Against this backdrop, continuity is the dominant expectation for Budget 2026. Jayesh Bavle, Chief Financial Officer, Bertelsmann India Investments, is outlining expectations around fiscal continuity, domestic consumption, and the transition to the new Income Tax Act.

Bavle said that one of the defining features of this government’s budgets has been the consistency of its focus areas, and expects the Budget to build further on this approach. Against the backdrop of ongoing global geopolitical uncertainty, strengthening domestic production and consumption has become increasingly important.

“Currently prevailing positive macroeconomic factors, such as low inflation and controlled fiscal deficit, provide the government with a timely opportunity to roll out consumption boosting initiatives in this budget. From a tax perspective, we do not anticipate sweeping changes and welcome the move towards the new Income Tax Act. Given its simplified and abridged structure, the underlying rules will be critical, and we look forward to greater clarity in the rules to support effective implementation and compliance,” said Bavle.

From an investor’s perspective, the move toward a simple and modern Income Tax Act is seen as a positive, particularly for long-term capitalists seeking clarity on compliance, litigation risk, and effective tax formulations.

The starkest data-backed concern is in innovation and deep technology funding. India’s gross expenditure on R&D remains at approximately 0.7 per cent of GDP, well below the global average of nearly 2 per cent. Venture funding into deep-tech and AI segments continues to account for a low double-digit share of total startup capital deployed, reflecting both capital constraints and infrastructure gaps.

Amit Kumar Tyagi, CEO, TrueReach AI, said that, to bridge the R&D gap, where India’s 0.7% GDP spend lags the 1.93 per cent global average, the restoration of the 200 per cent weighted deduction for R&D is vital for deep-tech startups facing long-gestation cycles.

“Furthermore, democratizing AI requires a national ‘Compute Credit’ scheme and a 3-5 year customs duty holiday on critical hardware like GPUs and TPUs. Without affordable access to the ‘physical’ backbone of AI, Indian startups remain at a competitive disadvantage. Capital remains the third pillar. Accelerating the INR 20,000 crore Deep Tech Fund of Funds will provide the patient long-term capital necessary to build foundational models. We also hope to see the PLI scheme extended to AI and Robotics, incentivizing domestic IP over foreign licensing,” said Tyagi.

Despite the announcement of an INR 20,000 crore Deep Tech Fund of Funds, operational rollout has been slower than anticipated, limiting its immediate impact on private capital mobilisation.

As Budget 2026 approaches, private investors appear aligned on priorities rather than demands: stable taxes, faster execution of announced funds, targeted R&D incentives, and selective consumption support.