India Budget – A fine balancing act
Authors: Prof. Dr. Jacky Tang, Chief Investment Officer EM - Wolf Kisker, Senior Investment Strategist - Swati Bashyam, Investment Officer APAC - Kaniz Fatema Rupani, Investment Strategist
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Key takeaways
What happened?
The Finance Minister of India, Nirmala Sitharaman, presented the Union Budget for fiscal year 2027 (FY27, i.e. from April 2026 to March 2027) on February 1, formally launching the parliamentary approval process. The Budget is focused on long-term sectoral reforms and strengthening economic growth, while maintaining fiscal prudence. The budget aims to support growth via six core sectors — Industrials, Healthcare, Consumer Discretionary, Materials and Utilities, Financials and Services (mainly IT) — each aligned to long-term economic expansion.
While the government is stepping up spending on reforms and growth, it is important to understand the underlying fiscal math. India’s Union Budget 2027 sets out a credible fiscal roadmap grounded in realistic revenue and expenditure assumptions. Revenue receipts are projected to grow around 6% to USD385bn, supported by robust increases in direct taxes (+11.4%) and corporate taxes (+11%), consistent with historical performance.
The government has also raised non-tax revenue expectations, driven by higher Reserve Bank of India (RBI) dividends and divestment proceeds to help fund planned expenditure.
On the spending front, revenue expenditure for FY27 is set at USD 449.5bn, rising 6.6% year-on-year. Capital expenditure remains a priority, with an allocation of USD133 bn — equivalent to 3.1% of GDP and up 11.5% year-on-year. Meanwhile, subsidies continue to moderate, declining about 4% to USD 44.7bn and now accounting for just 7% of total expenditure.
On the fiscal front, the government is transitioning to a debt-targeting framework, setting a path to bring the debt-to-GDP ratio down from 56.1% in FY26 to 55.6% in FY27, based on an assumed 10% nominal GDP growth for FY27. It has also outlined a medium-term glide path to gradually reduce the debt-to-GDP ratio toward 50% ± 1% by FY31. The fiscal deficit for FY27 is projected to be 4.3% of GDP, inching lower from 4.4% in the current year. To finance the fiscal gap, the central government has set gross borrowing at USD 187.67 billion and net borrowing at USD 127.6 billion. While gross issuance is to rise 16% from FY26’s USD 161.5 billion, net borrowing is to increase by only 1.4% from USD 125.9 billion. This divergence stems from a sharp surge in debt redemptions, which inflates gross borrowing, at the same time as the government keeps net borrowing largely stable by maintaining its commitment to fiscal consolidation and debt sustainability.
However, the record gross supply has raised concerns about upward pressure on long term bond yields, given that long-term dated securities remain the government’s primary instrument for deficit financing. In addition, with a new set of GDP data is expected by end-February, key debt ratios may shift once the revised macro framework becomes operational.
Within the six core sectors, the Union Budget allocates USD133bn in capital expenditure to strengthen the industrial and infrastructure ecosystem, marking an 11% year-on-year increase and supporting growth across construction, high-speed rail, waterways, transport, and logistics. The government has also committed USD 4.36bn to India Semiconductor Mission 2.0 and allocated an additional USD 4.36bn to the Electronics Components Manufacturing Scheme to deepen domestic manufacturing and supply-chain capabilities.
Defence capital expenditure has been increased to USD 23.9bn for FY27, up 17.6% from the FY26 revised estimate, underscoring the push toward a modern and self-reliant defence sector.
In Healthcare, the budget provides a major boost through the Biopharma Shakti initiative, allocating USD 1.09bn over five years to develop India as a global biopharma manufacturing hub. The plan includes building capabilities in biologics and biosimilars, creating 1,000 accredited clinical-trial sites, and expanding pharmaceutical education through new and upgraded National Institutes of Pharmaceutical Education and Research (NIPER). Additionally, five specialised medical-tourism hubs will be established to integrate hospitals, diagnostics, recovery facilities, and traditional Ayush treatments, strengthening India’s position as a global healthcare destination.
For Consumer Discretionary, the Production Linked Incentive (PLI) outlay for autos and auto components has tripled to USD 648mn for FY27 from USD218mn in FY26, supporting faster electric-vehicle (EV) adoption and strengthening domestic component manufacturing. The government is also developing rare-earth magnet corridors in four states to reduce import dependence and reinforce the EV supply chain. In addition, the customs-duty exemption on equipment used for lithium-ion cell production has been extended to include Battery Energy Storage System (BESS) cells, helping expand India’s battery-manufacturing ecosystem beyond EVs.
In the Materials sector, the government’s plan to develop rare-earth magnet corridors aims to enhance domestic mining, processing, and manufacturing of critical minerals essential for advanced-materials production and to strengthen India’s strategic supply chain. For Utilities, the budget maintains strong support, with capital expenditure rising 11% to USD 10bn, reinforcing ongoing investments in power, water, and grid infrastructure.
For Financial, the government has announced a high-level committee to strengthen bank governance and efficiency, potentially paving the way for broader reforms such as consolidation. For Non-Bank Financial Institutions (NBFIs), a structured plan has been introduced to support growth, encourage technological upgrades, and reorganise key institutions to enhance their role in infrastructure financing. Moreover, the record gross borrowing target for FY27 is expected to push bond yields higher, leading to mark-to-market pressures for banks, particularly public sector banks with large government-bond holdings. Additionally, in capital markets, the Securities Transaction Tax (STT) on Futures and Options (F&O) is to be raised (due to come into force on April 1, 2026), reversing expectations of tax relief. For futures, the transaction tax rate is to be hiked by a 0.03 percentage points (from 0.02% to 0.05% ), while for options premium and exercise of options transaction tax rate was by 0.05 percentage points (from 0.1% to 0.15%) and a 0.025 percentage points (from 0.125% to 0.15%) respectively.
For futures, the transaction tax rate is to be hiked by a 0.03 percentage points (from 0.02% to 0.05% ), while for options premium and exercise of options transaction tax rate was by 0.05 percentage points (from 0.1% to 0.15%) and a 0.025 percentage points (from 0.125% to 0.15%) respectively.
The Services sector is to receive strong support as Global Capability Centres (GCCs) will now have clear tax rules under a unified services category. The safe harbour margin — a preset profit margin under transfer pricing that companies can use to avoid detailed tax scrutiny and ensure certainty — is fixed at 15.5%. This fixed rate aims to provide companies with greater predictability, reduce compliance disputes, and make tax planning simpler. The eligibility threshold has been raised sharply — from USD 32mn to USD218mn — allowing many more firms to qualify. Safe-harbour approvals will now be automated through a rules-based system, making compliance easier for India’s 1,800–1,900 GCCs. In addition, foreign companies that use data-centre services in India to provide global cloud services will receive a tax holiday until 2047, provided they serve Indian customers through an Indian reseller and apply a 15% safe-harbour margin when the data-centre provider is a related entity.
However, despite the budget’s long-term orientation, what weighed on equity market investor sentiment was the hike in securities and transaction tax, instead of much anticipated capital gains taxes relief.
What does it mean for investors?
The FY27 Union Budget sets a market backdrop defined by fiscal discipline, sustained public investment, and targeted sector incentives. Given the government’s solid majority, the budget is expected to pass smoothly, with few to no significant amendments. While the immediate market reaction was overshadowed by the sharper-than-expected increase in STT with the benchmark Sensex and Nifty indices falling by around 2% each, the broader policy framework continues to support India’s medium-term growth story. Equities posted a partial recovery today rising around 1%. The recovery was supported by value-buying investors even amid a broader sell-off in Asian equities and tech sector today as markets recalibrate following the appointment of Kevin Warsh as the new Federal Reserve chair. For investors, the Budget should give rise to a mix of short-term volatility and long-term opportunity across asset classes.
Fixed Income – Constructive despite record supply
The fiscal deficit target of 4.3% of GDP aims to keep the consolidation path intact. The RBI’s expected Open Market Operations — offsetting both FY26 spillovers and heavier FY27 issuance — should help anchor medium-term yields. Despite record gross borrowing, the government’s disciplined fiscal stance and realistic revenue assumptions support overall bond-market stability.
Bond markets reacted negatively to the budget announcement, with the 2-year, 10-year, and 30-year yields rising 1.7bps, 6.3bps, and 8.7bps to 5.8%, 6.8%, and 7.4%, respectively, today. Yields remain elevated despite the RBI’s unprecedented liquidity support via record bond purchases and FX swaps. A stronger US dollar and rising long-term US Treasury yields following the nomination of former Federal Reserve Governor Kevin Warsh as the next Fed chair are also weighing on bond prices.
Looking ahead, we expect the RBI to stay on hold as it assesses the transmission of last year’s 125bps of rate cuts to the real economy. Investors should expect range-bound to mildly elevated yields in the short run, but with reduced risk of a sustained spike thanks to policy backstops. Duration exposure may require careful calibration, but the medium-term backdrop still favours a gradual cooling of yields once liquidity measures take hold and external pressures stabilise.
INR – Stable outlook
The currency stands to benefit from:
Overall, the INR is expected to remain broadly stable on fundamental grounds, while any positive developments on the long pending US India trade deal could serve as an additional tailwind.
The Budget should reinforce India’s strong macro foundation and sets the stage for continued investment-led growth. While the STT hike has triggered near-term market discomfort, the underlying policy architecture remains supportive for equities, selective fixed-income strategies, and a stable currency outlook. Medium-term investors should stay constructive, focusing on industrials, healthcare, services, real estate, selective financials and discretionary consumption themes.
Equities – Constructive outlook despite near-term caution
Equity sentiment turned cautious following the announcement of the significant STT hike on derivatives, which dampened trading activity and added to market volatility. The absence of capital gains tax reform also created a short-term overhang. However, underneath this near-term noise, the structural equity narrative remains intact:
We maintain a constructive view on Indian equities and see ongoing market corrections as opportunities to accumulate quality names.
Double-digit earnings growth expected in 2026 strengthens the medium-term risk–reward profile. Earnings for the MSCI India index are expected to grow 18.6% and 15.5% in 2026 and 2027, respectively. Over the past five years, MSCI India’s 12- month forward price-to-earnings (P/E) has fluctuated between 19x and 25x. At present, with the next 12-month forward P/E ratio at 21.1x, valuations are closer to the lower end of the band, offering potential buying opportunities for medium-term orientated investors. In terms of sectors, analysts expect EPS growth for our top pick sectors — industrials, financials, and healthcare — at 25%, 15% and 8% over the next 12 months, with 12-month forward P/E currently at 30.9x, 17.2x and 30.3x, respectively.
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