Union Budget 2026 bets big on industrial growth

Budget 2026-27 comes at a time when the economy is experiencing a rare goldilocks period of high economic growth and low inflation. The Indian economy has become the fourth largest, overtaking Japan, retaining its tag of being one of the fastest growing economies. Beneath the headline numbers lie some inherent challenges, which could be amplified by the uncertainty emanating from the geopolitical crises and tariff wars, and have the potential to hinder long-term growth. A fine balance between optimism and realistic assessment is needed at this juncture to sustain growth and enhance welfare. The Budget attempts this with a slew of long- and short-term measures. It lays out a grand vision, skips specificities and maintains continuity over short-term policy stimuli.

The raise in the capex target to ₹12.2 lakh crore for FY27 from ₹11.2 lakh crore earmarked for the current fiscal signals continuity in maintaining growth primarily fuelled by public infrastructure expenditure. Reaffirming a commitment to fiscal consolidation while continuing to prioritise capital spending to support growth, the fiscal deficit target has been set at 4.3% of GDP for 2026-27.

Sticking to fiscal prudence

The Budget shows that the overarching macro policy objective is to stick to fiscal prudence as the proposed numbers seem to be on the path of targeting the debt-to-GDP ratio of 50% in the midterm though it would be at 55.6% this year. Fiscal deficit involves a gross borrowing of ₹17.2 trillion and a net borrowing of ₹11.7 trillion.

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Though the net outflow from the market is the same, the gross borrowing is higher than last year. Growth in nominal GDP has been assumed to be above 10%, which appears more realistic. When we assume growth of 6.8%-7.2% in real GDP, as in the Economic Survey, inflation will be at 2.9%-3.2% in terms of the GDP deflator. This tends to indicate an average CPI inflation of closer to 4%-plus in the year ahead. These numbers will change when the new series of GDP is published.

However, there may not be too much room for further rate cuts in this scenario, given the larger borrowing programme.

Support for frontier sectors

Marking a stark departure from earlier Budgets, the focus on the manufacturing sector was right in the beginning of the Finance Minister’s Budget speech. There is a concerted attempt to push industrial growth by targeting the emerging, legacy and the Micro, Small, and Medium Enterprises (MSME) including the khadi and handicrafts sectors.

The expansion of support for seven strategic and frontier manufacturing sectors, which includes semiconductors, electronics components, biopharma, chemicals, capital goods and textiles, is an intent to move beyond Production Linked Incentives. The Electronics Component Manufacturing Scheme outlay was increased to ₹40,000 crore, while the India Semiconductor Mission 2.0 was announced to deepen domestic chip manufacturing and reduce reliance on vulnerable global supply chains.

The Budget also announced ₹10,000 crore for a new container manufacturing scheme and reinforced the logistics backbone that is critical to export competitiveness through major freight corridors and transport investments. It also responded to disruptions caused by the tariff conflict between China and the United States, which has tightened access to critical minerals, most of which are inputs for electronics, defence equipment, electric vehicles and renewable energy systems.

Measures are addressed towards the export sectors hit by higher U.S. duties, particularly textiles, leather and seafood. The announcements related to MSMEs signal a shift toward a structural strengthening of financing. The proposed ₹10,000 crore small and medium enterprises (SME) Growth Fund is expected to complement bank credit by addressing the equity gap for scalable enterprises.

The Budget sprang some surprises. First, despite the huge gap between intention and execution of disinvestments, there is an expectation of revenue realisation from disinvestments. The target for last year was ₹47,000 crore of which only ₹8,768 crore was realised. Second, it laid out a proposal for global cloud service providers such as Microsoft, Google and Amazon to use more Indian data centres, promising zero tax until 2047 on global cloud services provided by them through an Indian entity and from an Indian data centre. Twenty-two years of tax concession is one of the longest ever. Third, despite the low employment elasticity of the services sector, it anticipates higher employment generation in this sector. This seems contradictory as we see Artificial Intelligence and other technologies pushing jobs out of segments within services. Fourth, the push for more data centres does not seem to be backed by more thrust on power generation, as these centres consume more power.

Finally, though the Economic Survey pointed out the paradox in the system, that is a very good economy coexisting with a rather volatile rupee, the Budget maintains a silence on this.

The gaps

Though the Budget starts with a thrust on the manufacturing sector, it needs to be complemented with a comprehensive industrial policy. Otherwise, these announcements would remain disjointed parts of a larger package. The focus on industrial growth also need sustained domestic demand, on which there is little discussion. The effective capital expenditure for 2025-26 was budgeted at ₹15,48,282 crore but the actual has only been ₹14,03,906 crore. This shortfall affects the assumed multipliers and demand generation thereof. As external demand is volatile, domestic employment and income growth are crucial for expansion of the manufacturing sector. This has the potential of turning out to be the weak link especially during a period of price rise. Ensuring this would be the challenge for 2026-27, for which we need to run a marathon and a sprint at the same time

M. Suresh Babu is Director, Madras Institute of Development Studies. The views expressed are personal.

Published – February 02, 2026 12:08 am IST