Budget 2026: Big bang reforms unlikely; infra push, structural measures to get focus amid global headwinds: PL Capital

The Union Budget for FY26-27 is expected to maintain a strong focus on infrastructure spending and structural reforms, even as global geopolitical uncertainty, trade tensions with the US, and slowing private investment pose fresh challenges, according to a report by PL Capital.

India enters the Budget season retaining its position as the world’s fastest-growing large economy and ranking fourth globally by GDP size. FY26 has delivered several macroeconomic positives, including multi-year low inflation, cumulative interest rate cuts of 125 basis points, reductions in income tax rates, GST rationalisation, and a normal monsoon.

These factors have supported robust economic momentum, with GDP growth for FY26 estimated at 7–7.3% despite punitive US tariffs and external headwinds.

However, PL Capital believes that major “big bang” announcements are unlikely in the upcoming Budget 2026-2027, following last year’s sweeping tax reforms. Instead, the government is expected to focus on sustaining growth through incremental reforms and targeted capital expenditure.

GDP growth

The brokerage firm highlights a temporary slowdown in growth, with India’s GDP projected to decelerate to 6.4% in FY25 — the weakest in four years — due to subdued private investment, a slowdown in manufacturing, and global economic pressures. A recovery is expected in FY26, with growth forecast at 6.5% – 6.8%, supported by government spending, monetary easing, and improving consumer demand.

Taxation

On taxation, PL Capital does not expect further rationalisation of direct taxes in Budget 2026. After last year’s major personal income tax adjustments, meaningful changes in tax slabs appear unlikely. The report flags concerns around tax collections, noting that year-to-date corporate and personal income tax growth remains below FY26 budgeted estimates, increasing the risk of a shortfall in direct tax revenues.

Capex

Capital expenditure is expected to see a moderate rise in FY27. While government capex rose 28% by November on a low base, PL Capital expects overall FY26 spending to largely remain on target, with limited scope for upward revisions due to the absence of supplementary approvals.

For FY27, the brokerage anticipates high single-digit to low double-digit growth in capex allocations, with defence spending likely to register a double-digit increase amid rising geopolitical tensions and Defence Acquisition Council approvals worth nearly ₹3.8 lakh crore in CY25.

Sectorally, capex allocation is expected to rotate toward power, roads, infrastructure, water, and sanitation, driven by PPP approvals. While order momentum has remained muted in EPC, railways, and core infrastructure segments, recent activity has picked up in power, renewables, transmission, and data centres.

Fiscal Deficit

On fiscal metrics, PL Capital warns of a potential mild slippage in the fiscal deficit due to weaker tax collections and higher incentive outlays. Although the government aims to meet its FY26 deficit target of 4.4% of GDP, higher interest costs and dependence on RBI dividends will be key variables to watch in the upcoming Budget.

Read Budget 2026 Expectations Live Updates here

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