Union Budget 2026–27 lays the groundwork for sustained growth with fiscal discipline: CareEdge Ratings
Mumbai, 3rd February, 2026: According to CareEdge Ratings, the Union Budget 2026–27 reflects a steady policy hand at a time when India’s economy is transitioning from recovery-led growth to a phase of consolidation and medium-term planning. The emphasis on capital expenditure, alongside a continued commitment to fiscal consolidation, reinforces macroeconomic stability and supports India’s evolving credit profile.
Mehul Pandya, MD & Group CEO, CareEdge said, “The Union Budget for 2026-27 comes at a time when India’s economy is undergoing a period of consolidation and planning. What stands out this year is not just the scale of announcements but the steady hand guiding them. The Budget continues many of the reforms already in progress, focusing on stability, productivity, and competitiveness. These qualities are crucial as growth needs to sustain itself in a changing global environment.”
CareEdge Ratings believes that the Union Budget 2026–27 provides a stable and predictable policy environment. The combination of sustained public investment, gradual fiscal consolidation and sector-specific support measures strengthens the resilience of the economy and supports medium-term credit stability.
According to Sachin Gupta, Chief Rating Officer, CareEdge Ratings, “Overall, the Budget reinforces a stable credit environment across sectors. The focus on long-term capacity creation, rather than short-term stimulus, augurs well for India’s sovereign and corporate credit outlook over the medium term.”
Update on the Recently Announced India-US Trade Deal
The recently announced India–US trade deal is a positive development for India’s exports, particularly for sectors such as gems and jewellery, textiles, and marine products. A key highlight is that India has managed to secure a lower tariff rate compared to competitors including China, Bangladesh, Vietnam, Malaysia, Cambodia, and Thailand. Based on our estimates, this tariff reduction could add ~20 bps to GDP growth in FY27.
Additionally, easing trade uncertainties are likely to support a revival in foreign investment inflows, providing greater stability to the rupee. This could allow the RBI to scale back its forex interventions, which had intensified over the past few months amid heightened volatility. Furthermore, with a stable rupee the RBI could better support the borrowing plans of government and domestic liquidity conditions through higher quantum of open market operations.
A Budget Anchored in Stability and Continuity
CareEdge Ratings notes that the overarching message of the Budget is one of predictability. Rather than introducing sharp policy shifts, the government has chosen to build on reforms already underway, with a focus on productivity, competitiveness and long-term capacity creation. This approach is particularly relevant in the current global environment, where growth uncertainties persist and capital flows remain sensitive to macro stability.
Commitment to Fiscal Discipline
Despite weaker tax and subdued disinvestment receipts in FY26, the government was able to achieve the fiscal deficit target of 4.4% of GDP due to lower spending and higher RBI dividend transfers. Centre’s budgeted fiscal deficit for FY27 at 4.3% is reasonable. At the same time, the Centre’s debt-to-GDP ratio is expected to decline to 55.6% in FY27 from 56.1% in FY26, reinforcing confidence in India’s fiscal trajectory. As per CareEdge assessment, even with the assumption of a conservative nominal GDP growth of ~10% in the coming years, the Centre should be able to reduce its debt to GDP ratio to ~50% by 2031.
According to Rajani Sinha, Chief Economist, CareEdge Ratings, “The pace of fiscal consolidation may appear gradual, but it is deliberate. This balance between supporting growth and preserving fiscal credibility is important for sustaining investor confidence and managing medium-term debt dynamics,”
FY27 Tax Growth to Moderate Amid GST Cuts; Dividends & Miscellaneous Receipts Budgeted Higher
Gross tax revenue is budgeted to increase by 8% in FY27, compared to 7.4% in FY26. With a projected nominal GDP growth of 10% in FY27, gross tax buoyancy stands at 0.8. Overall, the budgeted tax growth appears reasonable. Direct taxes are budgeted to grow by 11.4% in FY27, significantly outpacing the 1.9% growth in indirect taxes. The impact of GST rationalisation is expected to spill over into the next fiscal year as well, resulting in a 2.6% contraction in GST revenues.
The Centre has budgeted dividend receipts of Rs 3.2 trillion from the RBI and PSBs in FY27 (vs Rs 3 trillion in FY26), implying elevated dividends from the RBI. Miscellaneous capital receipts (divestment and asset monetisation) are budgeted significantly higher at Rs 800 billion in FY27, compared to Rs 338 billion in FY26. Achieving the disinvestment target remains critical given the Centre has underachieved its disinvestment targets in the past.
Public Investment Continues to Anchor Growth
A defining feature of the Union Budget 2026–27 is the continued reliance on public capital expenditure as the primary growth driver. Capital expenditure has been budgeted at Rs 12.2 lakh crore, reflecting an 11.5% year-on-year increase. Factoring the grants-in-aid for capital asset creation and CPSE investments, total capex growth is budgeted to be significantly higher rising by 19.6% in FY27.
CareEdge Ratings believes that this sustained focus on asset-creating expenditure improves the quality of government spending and strengthens the foundation for future growth. Infrastructure creation not only supports near-term demand but also improves productivity, logistics efficiency and private sector competitiveness over the longer term. It believes that the higher allocation towards capex, relative to revenue expenditure, supports durable growth and enhances the economy’s growth potential.
Infrastructure-linked sectors such as roads, railways, logistics, capital goods and cement are expected to continue benefiting from this investment momentum. Importantly, the continuity of capex reduces execution uncertainty and improves planning visibility for both public and private sector participants.
Managing Fiscal Pressures Amid High Borrowings
While gross market borrowings remain elevated at Rs 17.2 lakh crore for FY27, largely due to higher redemptions. The higher-than-expected gross borrowing could increase upward pressures on yields unless the RBI increases OMO purchases. Net market borrowings are estimated at Rs 11.7 trillion for FY27. Reliance on net borrowings to fund fiscal deficit is budgeted to increase to 69%, up from 67% in FY26.
Services Sector: Employment, Exports and Stability
A notable feature of the Budget is its clear emphasis on the services sector, reflecting its growing role in employment generation, exports and value addition. Measures targeted at IT and digital services, healthcare, education, tourism and the creative economy indicate a strategic intent to strengthen India’s position in global services trade.
The rationalisation of the safe harbour regime for IT services and incentives for data centres are expected to encourage investments by global technology firms. From a credit perspective, these measures support stable cash flows for IT services companies, while also benefiting allied sectors such as office real estate and data centre infrastructure.
In healthcare, proposals to strengthen medical education, allied health capacity and medical tourism are expected to improve operating efficiency and revenue visibility for organised hospital players.
Manufacturing: Building Depth, Not Just Scale
The Budget continues to reinforce manufacturing as a long-term growth pillar, with targeted interventions across semiconductors, electronics, biopharma, capital goods, textiles and rare earths. Rather than focusing solely on scale, the emphasis this year is on strengthening domestic ecosystems and reducing import dependence in strategic segments.
Higher allocations under select PLI schemes, coupled with initiatives such as semiconductor ecosystem development and rare earth corridors, are expected to gradually deepen India’s manufacturing base. While the credit impact may be uneven in the near term, CareEdge Ratings believes these measures improve medium-term visibility for capacity expansion and investment. It notes that manufacturing initiatives announced in the Budget are likely to have a staggered impact. However, they improve long-term competitiveness and support healthier credit metrics for companies that successfully integrate into these value chains.
MSMEs: Formalisation and Credit Access
MSMEs remain central to the government’s growth strategy, and the Budget combines equity support with measures aimed at improving liquidity and payment discipline. The proposed ₹10,000 crore SME Growth Fund, along with additional support to existing funds, is expected to catalyse equity investments through a fund-of-funds structure.
Equally important is the deepening of the Trade Receivables Discounting System (TReDS), including mandatory usage by CPSEs and potential securitisation of receivables. CareEdge Ratings views this as a structural reform that can materially improve cash flow visibility for MSMEs.
Financial Sector: Gradual Deepening, Measured Reforms
The Budget introduces several steps to deepen financial markets, including proposals for corporate bond market development, partial credit guarantees for infrastructure financing and a review of banking sector regulations through a high-level committee.
CareEdge Ratings believes these initiatives can improve credit transmission and funding efficiency over time, particularly for infrastructure developers and NBFCs. However, the impact will depend on implementation and market adoption. The increase in Securities Transaction Tax (STT) on derivatives may moderate trading activity, with implications for select intermediaries.
Infrastructure, Energy and Urbanisation: Long-Term Visibility
Infrastructure and urban development continue to form the backbone of the growth strategy. Investments in freight corridors, high-speed rail, waterways and city economic regions are expected to improve logistics efficiency and support industrial expansion.
In the energy sector, initiatives related to carbon capture, clean energy manufacturing and nuclear power provide regulatory clarity and support a diversified energy mix. These measures are expected to support stable offtake and improve long-term sustainability metrics. According to CareEdge Ratings, Policy continuity in infrastructure and energy enhances execution confidence and improves project viability, which is positive from a credit standpoint.
“As we move toward the vision of Viksit Bharat, the underlying message is clear: progress will rely on collective effort. Government policy can set the direction, but real momentum will come from how institutions, businesses, and citizens respond to the opportunities ahead”, Mehul Pandya added.
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