Mumbai, Jan 22 : After a year that tested policymakers and businesses in unfamiliar ways, the Indian economy enters Budget 2026 with three clear expectations: sustaining domestic growth momentum, maintaining fiscal discipline, and cushioning the economy against external shocks to trade and capital flows.
The turbulence of 2025 was once again shaped by geopolitics, alongside rapid technological change and the reordering of global trade and capital movements. What began as threats of higher tariffs gradually hardened into more formidable barriers for India’s exports to the United States. Indian exporters responded by pre-shipping orders and redirecting goods to alternative markets strategies that helped soften the impact for much of the year.
India’s service exports, a long-standing strength, once again provided a stabilising force. However, the year ended on a more challenging note on the external front, with exports to the US declining and overall goods exports slowing.
The rupee’s sharp depreciation was another manifestation of global churn rather than domestic weakness. The currency slid against an already weak dollar amid foreign capital outflows following the imposition of a 50 per cent US tariff and growing investor interest in AI-led opportunities elsewhere.
Domestic buffers held firm
Despite these pressures, the domestic economy remained resilient. Benign crude oil prices—critical for a country that imports about 150 million barrels a month, accounting for nearly a quarter of its import bill—offered significant relief. Food inflation, long a concern due to recurring climate shocks, eased, creating room for monetary policy support.
The Reserve Bank of India responded by cutting the repo rate by 125 basis points and reducing the cash reserve ratio by 100 basis points, boosting lending conditions. Fiscal support through income tax relief and GST reductions on mass-consumption items further supported household demand.
These measures, combined with expanding credit availability, helped sustain consumption and encouraged the private corporate sector to consider capacity expansion. A strong agricultural output following abundant rainfall added to rural purchasing power, creating another pillar of support for growth.
These buffers are expected to carry into 2026, even as the trio of pressures—geopolitics, trade disruption and capital volatility—that triggered uncertainty last year continue to linger.
How Budget 2026 may differ
Against this macroeconomic backdrop, Budget 2026 is likely to differ from previous budgets in at least four key ways.
First, the pace of fiscal consolidation is expected to be gentler. With the Centre already meeting its fiscal deficit target, further reductions aimed at lowering debt levels are likely to be incremental. Fiscal deficit reduction was sharp between FY21 and FY24, but the pace has slowed in recent years, with the deficit now at 4.4 per cent of GDP.
Second, while public capital expenditure will remain a priority, the budget will need to place greater emphasis on crowding in private investment through targeted incentives.
Third, additional consumption stimulus may be unnecessary. The effects of earlier tax relief and mid-year GST cuts are still playing out, while states have increased welfare spending through direct benefit transfers. At the same time, revenue collections have faced pressure due to tax cuts and slower-than-expected nominal GDP growth, limiting fiscal headroom.
Fourth, exporters are likely to need targeted support. The full impact of higher US tariffs is yet to be felt, while the European Union’s Carbon Border Adjustment Mechanism (CBAM) threatens to raise costs and compress margins for Indian exporters.
Policy priorities ahead
The policy response will need to be two-pronged: accelerating decarbonisation efforts to address non-tariff barriers such as CBAM, and fast-tracking trade agreements at a time when global trade volumes are expected to remain largely stagnant.
Growth in the coming year will largely reflect policy measures already in place. GDP growth is expected to moderate to around 6.7 per cent in FY27, driven by steady consumption and a modest revival in private investment. A high base effect and moderation in government capex are likely to temper expansion.
Consumption should continue to benefit from lower interest rates and higher disposable incomes following tax cuts. Inflation, meanwhile, may edge up towards 5 per cent, reflecting a low base, benign oil prices and the lingering impact of GST reductions.
Ultimately, Budget 2026 may matter less for headline numbers and more for the strategic direction it sets for navigating a challenging global environment.