Budget 2026 Likely to Favour Continuity Over Big Bang Reforms

After several years of elevated pandemic-era spending, the government is firmly back on a fiscal consolidation path, narrowing the deficit from over 9 per cent of GDP in FY21 to 5.6 per cent in FY24, 5.1 per cent in FY25 (RE), and a budgeted 4.9 per cent in FY26. 

As India heads into Union Budget 2026, expectations across markets and industry remain restrained. After several years of elevated pandemic-era spending, the government is firmly back on a fiscal consolidation path, narrowing the deficit from over 9 per cent of GDP in FY21 to 5.6 per cent in FY24, 5.1 per cent in FY25 (RE), and a budgeted 4.9 per cent in FY26. 

Estimates currently predict the FY27 fiscal deficit at around 4.3 per cent of the GDP. 

Yet, low expectations often create the conditions for positive surprises. With real GDP growth holding near the 6-7 per cent range, inflation moving closer to the central bank’s tolerance band and public investment acting as a stabilising force, even calibrated interventions could have an outsized impact on sentiment- particularly if they are directed toward productive spending and structural reform.

This dynamic is reflected in Motilal Oswal Financial Services Ltd’s assessment of the pre-Budget environment. The company, in its report, said that expectations stay “modest” and it is setting the stage for positive surprises. 

“Investor expectations from the FY27 Union Budget remain deliberately low, as policymakers balance growth priorities with fiscal discipline amid global uncertainty. With limited anticipation of big-ticket announcements, even selective measures could deliver positive market sentiment” said the report. 

The report highlighted that investors are not expecting large substantive measures in FY27, with lower expectations creating room for positive surprise through targeted initiatives. Fiscal deficit is projected at ~4.3 per cent of GDP in FY27E, with the government remaining committed to its consolidation path. The finserv company said, “Minor fiscal stretch possible if directed towards capex; Markets likely to support productive spending over low-multiplier outlays.”

The outlook underscores that investors are not anticipating major shifts, but are emphasising continuity.  With central government capital expenditure having risen from INR 4.4 lakh crore in FY21 to INR 10 lakh crore in FY24, and budgeted at INR 11.1 lakh crore in FY25, public capex has grown at a compound annual rate of over 30 per cent in recent years.

One sector watching the Budget closely is residential housing, which has shown resilience despite tighter financial conditions. Urban India has consistently recorded annual residential sales of over 400,000 units across the top seven cities, supported by rising incomes, improved connectivity, and long-term demographic demand. Home loan interest rates, while elevated at around 9-9.5 per cent, remain below historical peaks seen in earlier decades.

Pramod Kathuria, Founder & CEO, Easiloan, said that the Union Budget 2026 is expected to bring greater stability and clarity for residential borrowers. 

“Continued infrastructure spending supports housing demand, while homebuyers look for predictability in tax provisions and interest-related incentives when making long-term purchase decisions. Measures that rationalise deductions and reduce policy uncertainty can further strengthen confidence, particularly among first-time and end-use homebuyers,” said Kathuria. 

Housing has one of the strongest multiplier effects in the economy, with every INR 1 invested in housing estimated to generate INR 1.5-2.0 in allied sectors such as cement, steel, construction services, and consumer durables.

The Budget is also expected to address the evolving contours of India’s credit ecosystem. Despite rapid digitisation, India’s credit-to-GDP ratio remains at 55-60 per cent, significantly below levels seen in developed markets, where ratios often exceed 150 per cent.

India’s digital public infrastructure has laid the foundation for this expansion. Unified Payments Interface (UPI) transactions now exceed INR 18 trillion per month, while the Account Aggregator framework has enabled over 100 million accounts to share consent-based financial data, facilitating cash-flow-based underwriting.

Rohit Garg, Founder and CEO, Olyv, said that as India’s credit ecosystem evolves, the focus in this Budget should be on deepening trust, transparency and access within the formal lending system. 

“Clear and consistent policy frameworks for digital lending, stronger data infrastructure, and continued emphasis on financial literacy can go a long way in ensuring credit reaches the borrowers responsibly. A Budget that strengthens collaboration between fintechs and regulated lenders, while keeping consumer protection at the core, will be key to building a resilient and inclusive financial system” said Garg. 

Nowhere is the need for policy recalibration more evident than in the MSME sector. India is home to approximately 63 million MSMEs, employing over 110 million people, contributing around 30 per cent of GDP, and accounting for nearly 45 per cent of exports. Despite this scale, the sector faces an estimated credit gap of INR 20-25 lakh crore.

Ritesh Jain, Co-founder, FlexiLoans.com, said that  India’s MSME sector has evolved far more rapidly than the policy frameworks designed to support it. 

“From our experience of working closely with MSMEs across the country, today’s enterprises are increasingly digital-first, service-oriented, and data-driven.

However, much of the existing policy architecture continues to reflect a manufacturing-heavy, asset-led view of the sector. Pre-Budget discussions across industry forums suggest a growing consensus: the next phase of MSME growth will depend less on short-term stimulus and more on structural facilitation” said Jain.