Finance minister Nirmala Sitharaman will present the Union Budget for 2026–27 on 1 February, with expectations running high across sectors at a time when the global economy is grappling with tariff pressures and heightened geopolitical uncertainty that continue to disrupt cross-border trade.
Despite the volatile global macroeconomic environment, the Indian economy remains resilient. Analysts expect to steer clear of populist measures as the government pursues fiscal consolidation, instead prioritizing capital expenditure and investment in social infrastructure.
Morgan Stanley expects the government to peg fiscal deficit at 4.2% of GDP in FY27, compared with a target of 4.4% in FY26 announced by Sitharaman in the Union budget, and marking the shallowest pace of consolidation since FY23.
India’s fiscal deficit for the April-October 2025 period stood at ₹8.25 trillion, or 52.6% of the 2025-26 budget target, according to the latest data released by the Controller General of Accounts, up from ₹7.51 trillion, or 46.5% of the estimate, in the same period last year. The government ended FY25 with a fiscal deficit of 4.8%, lower than the revised estimate of 4.9%.
“The pace of will be consistent with central government debt reduction to 55.1% of GDP from 56.1% in FY26. A pickup in nominal growth will help to lift tax buoyancy and improve tax collections in FY27, helping the government to prioritize capex and social infrastructure-related spending alongside gradual consolidation,” a team of economists and strategists at Morgan Stanley said in a report.
The central government’s debt stood at 57.1% of nominal GDP in FY25, according to FY26 union budget documents, which proposed a shift to debt-to-GDP targeting. In the pandemic year of FY21, it was at 61.4% of GDP.
Over the medium term, the global investment bank expects the government to pursue gradual fiscal consolidation to meet its target of reducing the government debt-to-GDP ratio to 50% (±1 percentage point) by FY31.
Morgan Stanley expects the overall theme of the to reflect these priorities:
• Focus on social and physical infrastructure expansion
• Improving ease of doing business to propel private investments
• Focus on creating productive jobs alongside skilling of the labour force
• Increasing manufacturing capabilities
• Improving ease of living
Industry Expectations from the Budget
Real Estate
For the sector, Morgan Stanley expects the government to consider allowing deductions for interest paid on home loans for self-occupied properties under the new income tax regime. At present, no such deduction is available, while the old tax regime allows an annual deduction of up to ₹2 lakh. The move could significantly improve housing demand.
The analysts also see a need to revive mid-income and demand by reintroducing the Credit Linked Subsidy Scheme (CLSS) on home loans, offering subsidies of 3–4% of the loan amount. Additionally, they expect the affordable housing price cap to be revised upwards to ₹75 lakh from the current ₹45 lakh to reflect rising construction and land costs.
“This would expand eligibility for incentives, improve project margins, and help revive supply,” Morgan Stanley said.
Automobile
Key expectations for the automobile sector include higher budgetary support for electric vehicle (EV) infrastructure and greater clarity on schemes aimed at promoting domestic manufacturing of sintered rare earth permanent magnets.
Hotels
Morgan Stanley expects pan-India inclusion of the hotel industry in the infrastructure sector, which will help lower the cost of debt.
Financials
For the financial sector, the analysts highlight the need for incentives to promote digital payments, harmonisation of tax treatment on interest income across deposit categories, and expansion of credit guarantee schemes for MSMEs and MFIs. Other expectations include enhanced budgetary allocation and simplified processes for availing interest subsidies under PMAY 2.0, along with raising the tax rate for life insurers to normal corporate levels.
Energy and Chemicals
Morgan Stanley sees the possibility of a ₹2 per litre increase in fuel taxes in Budget 2026.
Metals and Cement
Outlays for cement- and steel-intensive sectors will be a key area to watch amid the government’s infrastructure push. The analysts expect higher allocations toward affordable housing under PMAY, along with policy measures or spending aimed at critical minerals and rare earth elements.
Consumer
Analysts expect general measures in the Budget 2026 to revive consumption.
Telecom
For the telecom sector, Morgan Stanley expects relief on Universal Service Obligation Fund (USOF) charges until the existing corpus is exhausted. Other anticipated measures include a reform package related to adjusted gross revenue (AGR) dues, exemption of service tax on incremental licence fees and spectrum usage charges arising from the Supreme Court’s AGR ruling, and a reduction in overall licence fees.
The analysts also expect an extension of the carry-forward period for business losses from eight years to 16 years. Support for data centre developers could include conditional tax holidays linked to capacity or green energy targets, customs duty waivers on imported equipment such as GPUs, or higher GST input tax credits.
Industrials
Infrastructure: Overall allocation is expected to rise by 8–10%, with a focus on growth over revised FY26 expenditure estimates.
Railways: Expect 5-6% growth in allocation; across areas like: track infra, new routes, safety system, and rolling stock. Details on three new corridors and new trains (Vande Bharat and Amrit Bharat) are likely to be announced.
Defence: Expect 12-15% growth in allocation. Key to watch would be allocation for local and private companies.
Energy Generation: Reiteration of government thrust on clean energy across renewable energy, BESS adoption, nuclear (including small modular reactors), and pumped storage projects.
Energy Distribution: Financial package for discoms with conditions to undertake reforms with an objective to improve financial health and possible privatization/strategic stake sale.
Electronics: The Central government is working on the Semiconductor 2.0 package to increase value addition and enhance the ecosystem in India, the analysts noted.
Internet, eCommerce
Morgan Stanley expects incentives to promote startups adopting emerging technologies such as AI/ML, quantum computing, and blockchain. The analysts also see scope for broader tax benefits on ESOPs to cover a larger pool of startup employees.
Media
Reduction in DTH License fee and other policy changes per TRAI recommendations on DTH Services.
Pharma
The analysts expect continued emphasis on increasing public health spending, with a focus on primary , hospital infrastructure, and workforce capacity. Likely measures include incentives for innovation, R&D tax benefits, and steps to enhance cost competitiveness to reinforce India’s position as the “Pharmacy of the World.”
Continued support for APIs through PLI schemes, reduced import dependence for , expansion of Ayushman Bharat, and initiatives to improve access to essential medicines and chronic disease management are also expected.
Read Budget 2026 Expectations LIVE Updates
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.