Finance Minister (FM) Nirmala Sitharaman will be presenting her record ninth consecutive Budget on February 1st 2026, in the backdrop of heightened geopolitical tensions in a VUCA (volatility, uncertainty, complexity, and ambiguity) world.
Despite Trump tariffs, the Indian economy has done well and is poised to clock a GDP growth of 7.4% in FY26.
The average annual GDP growth during FY22 to FY26, factoring in the estimated 7.4% GDP growth for FY26, is an impressive 8.1%, assisted, of course, by the low base of the Covid year FY20-21. Inflation, the fiscal deficit, and the current account deficit are under control.
The fact that India has achieved this impressive growth while maintaining financial stability enhances the quality of its growth.
Even though the US-India trade deal is still hanging fire, the mega India–EU trade deal has come as a shot in the arm for the economy.
While the macros paint a robust picture, the micros are struggling. The impressive 24% CAGR in corporate earnings from FY21 to FY24 suddenly took a turn for the worse, dipping to 5% in FY25, pushing market valuations to elevated levels.
The AI trade, which dominated global stock markets in 2025, and the massive FII selling of $18 billion made India a huge underperformer in 2025.
There is a clamour for tax relief from investors. There is a view that tax reliefs are needed to bring FIIs back to the Indian market. Can the FM provide tax relief?
2025 was the year of reforms
The year 2025 was a year of bold reforms. Budget 2025 raised the income tax exemption limit to ₹12 lakhs, GST rates were cut and rationalised in September 2025, and four new labour codes- consolidating existing 29 labour laws- were implemented in November.
The RBI gave a big push to growth by cutting interest rates four times in 2025 by an aggregate of 1.25%. These fiscal and monetary stimuli have succeeded in pushing growth to an estimated 7.4% in FY26.
However, the low inflation rate has dragged the nominal growth rate down to an estimated 8.2% in FY26 against the Budget estimates of 10.1%.
This low nominal GDP growth has impacted revenue buoyancy in FY26.
The government is likely to face a revenue shortfall of around ₹3 lakh crore in FY26. In this context of revenue constraints, it would be unrealistic to expect significant tax reliefs.
Tax relief unlikely
The income tax relief provided last year by raising the exemption limit to ₹12 lakhs was much better than expected.
It is important to understand that India’s per capita income is around ₹2,40,000. The exemption limit of ₹12 lakhs means that even if a person earns five times the per capita income, she need not pay tax.
This is fair taxation, and therefore, it would be unrealistic to expect further relief in income tax. Corporate tax, too, is fair, and changes are unlikely.
The long-term capital gains (LTCGs) tax, reintroduced in 2018, was rationalised in the 2025 Budget by fixing the rate at 12.5%, thereby making the tax uniform across all asset classes like equity, equity-oriented mutual funds, gold and real estate.
A change in this tax rate is unlikely within a year. Exemption of FIIs from LTCGs, like in many countries, would be a huge positive for markets, but this is unlikely since it requires the abolition of the LTCGs tax.
However, there is scope for raising the tax-exemption limit for LTCGs from the present 1.25 lakhs to a higher level.
Fiscal consolidation to continue
Fiscal consolidation has been a major success of the NDA government. The fiscal deficit has been brought down from 9.2% in FY21 to 4.5% in FY25.
The target for FY27 is likely to be 4.3% in FY27. From FY27 onwards, the government will be changing the matrix of fiscal discipline by moving from the present fiscal deficit to GDP ratio to debt to GDP ratio.
The FM is expected to target 55.5% debt to GDP with a commitment to bring it down to 50% by 2030.
Expenditure priorities
The Budget will be carefully watched for the expenditure priorities. In the context of ‘Operation Sindoor’ and global geopolitical tensions, the defence outlay is likely to be increased by more than 20%.
From the market perspective, this will again put defence stocks in the limelight. In the context of languishing private capex, the FM will continue increasing public capex, even under revenue constraints.
This will be positive for infra stocks. The focus of the Budget will be growth, not tax relief.
Given the volatile global geopolitical context, the continuing 50% US tariffs on India, and the elusive US-India trade agreement, the FM has to do a fine balancing act to sustain high economic growth by increasing expenditure wherever required, even while maintaining fiscal discipline.
The FM has proved through her previous Budgets that she has the economic acumen and political savvy to deliver a fine balancing act. Let’s keep our fingers crossed.
Disclaimer: The author of this article is Chief Investment Strategist at Geojit Investments Limited. The views and recommendations expressed are those of the author, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.