Union Budget 2026: Fiscal prudence to be key for growth; key sectors and stocks to watch
JM Financial expects the Union Budget 2026 to target a fiscal deficit of 4.4% of GDP, with muted tax collections prompting a measured approach.
- Jan 28, 2026,
- Updated Jan 28, 2026 2:47 PM IST
JM Financial projects that the Union Budget 2026 will be characterised by fiscal prudence, with the government expected to meet its fiscal deficit target of 4.4% of GDP for FY26, despite stretched public finances due to subdued tax collections. The report highlights that the government is likely to balance demand revival with infrastructure development, warning that growth could be affected if capital expenditure allocation falls below 3% of GDP.
According to JM Financial, "The central government’s fiscal situation remained stretched in FY26, mainly due to weak tax collections. We expect shortfall in tax revenue collections of Rs 2-2.2 lakh crore, which will exert pressure in meeting the fiscal deficit target of 4.4% of GDP in FY26. In our base case, we believe that the government will absorb these fiscal pressures by lowering spending, mainly in capex, and eventually meet its 4.4% target in FY26."
Tax collections during April-November 2025 constituted 54.7% of FY26 Budgeted Estimates, lower than the 59.5% average over the past four years and only slightly above the pandemic period. The fiscal deficit for the first eight months of FY26 reached 62.3% of the budgeted figure, which JM Financial considers stretched compared to recent years.
JM Financial expects the budget to be more inward-looking, prioritising domestic demand resilience, self-reliance in supply chains, and macroeconomic stability amid global uncertainties. They emphasise the need for a balanced growth framework that supports both capex and consumption, while avoiding sharp reductions in capex that could hinder momentum.
As the government transitions from monitoring fiscal health by 'fiscal deficit as a percentage of GDP' to 'debt as a percentage of GDP' from FY27, JM Financial states this shift may open space for a more expansionary fiscal policy. They believe fiscal prudence will continue, but the pace of consolidation will be shallow, with a base case of a 4.3% fiscal deficit and 54% debt-to-GDP in FY27.
JM Financial expects nominal GDP growth to benefit from the deflationary trend and a change in the base year, projecting 10.5% growth in FY27. Gross borrowing is likely to be higher at Rs 15.5 lakh crore due to redemptions, but net borrowings should remain stable at Rs 11.6 lakh crore. Benchmark yields may harden to 6.75%, risking incomplete monetary transmission even as the RBI injects liquidity.
The anticipated 8th Pay Commission is expected in the next fiscal year, with minimal immediate fiscal consequences and its budgetary impact likely to be reflected more in subsequent years. JM Financial underscores the importance of policy measures to improve women’s workforce participation and continued focus on manufacturing for a stronger ecosystem.
Discussing tax policy, JM Financial notes that India's taxpayer base has grown 2.3x to 116 million by FY25, but the direct tax base remains relatively narrow—covering only about 8.2% of the population and 12.6% of the working-age cohort. While rising income and improved compliance have gradually deepened the tax base, per capita income remains below the no-tax threshold. Income tax return filings grew at 9.3% CAGR over FY14–FY25, aided by digitisation. Further direct tax incentives appear unlikely, but incremental slab rationalisation and wider adoption of the new regime are probable.
JM Financial cautions that market expectations for the Union Budget are measured, with investors focused on policy continuity. The key challenge will be to avoid disruptive tax announcements that could unsettle sentiment or strain the fiscal math. The budget must balance capex and consumption support, avoiding sharp compression in capex below 3% of GDP. It remains to be seen if the government will announce bold reforms before the 2029 elections.
In conclusion, fiscal consolidation is expected to proceed slowly, with the government maintaining a cautious approach to avoid major disruptions. JM Financial’s base case for FY27 is a projected fiscal deficit of 4.3% of GDP and central government debt at 54% of GDP, underscoring the need for prudent fiscal management as India navigates global and domestic challenges.
Emkay Financial Services expects the budget to be a low-impact event for Indian equities. Growth stimulus is already in play and the space for further positive impulses is limited. Some further reforms may be announced, but most possible measures are slowburn and carry only a long-term impact, it said adding the composition of capex spend will be the key factor to watch.
"We expect positive outcomes for railways, defense, auto ancillaries, and EMS, while jewelry, life insurance, and housing finance may take marginal hits," said Emkay. It is overweight on discretionary, industrials and healthcare. It is neutral on technology, while remaining on underweight stance on materials, energy, staples, financials and telecom themes.
Its model portfolio includes names like Eternal, Maruti Suzuki, Dixon Technologies, Shriram Pistons & Ring, Lenskart Solutions, Gravita India, Reliance Industries, Tata Motors, Larsen & Toubro, Mphasis, Craftsman Automation, Hexaware Technologies, Sun Pharma, Bajaj Finserv, IDFC First Bank, RBL Bank, HDFC Bank, Shriram Finance.
Union Budget has to strike a deft balance of sustaining growth momentum and maintaining fiscal consolidation as it also needs to address near-term challenges emanating from unprecedented geopolitical flux, said Motilal Oswal. "Investors do not expect large substantive measures as the FM grapples to address multiple variables – thus setting the base lower for some positive surprise."
Motilal Oswal is positive on L&T, ABB, Siemens, Hitachi, Siemens Energy, KEC, Bharat Electronics, Bharat Dynamics, HAL, Ultratech, JK Cement, Polycab, KEI, Crompton, Titan, PN Gadgil, Niva Bupa, AMCs, RTAs, most HFCs, MFIs, Infra players, IGL, Mahanagr Gas, Gujarat Gas, Petronet LNG, GAIL, Waaree, Premier, NTPC, Tata Power, Acme, NTPC Green, Brigade, Prestige, Sobha, Lodha, Godrej Properties as key stocks and sectors likely to benefit from the budget 2026.
JM Financial projects that the Union Budget 2026 will be characterised by fiscal prudence, with the government expected to meet its fiscal deficit target of 4.4% of GDP for FY26, despite stretched public finances due to subdued tax collections. The report highlights that the government is likely to balance demand revival with infrastructure development, warning that growth could be affected if capital expenditure allocation falls below 3% of GDP.
According to JM Financial, "The central government’s fiscal situation remained stretched in FY26, mainly due to weak tax collections. We expect shortfall in tax revenue collections of Rs 2-2.2 lakh crore, which will exert pressure in meeting the fiscal deficit target of 4.4% of GDP in FY26. In our base case, we believe that the government will absorb these fiscal pressures by lowering spending, mainly in capex, and eventually meet its 4.4% target in FY26."
Tax collections during April-November 2025 constituted 54.7% of FY26 Budgeted Estimates, lower than the 59.5% average over the past four years and only slightly above the pandemic period. The fiscal deficit for the first eight months of FY26 reached 62.3% of the budgeted figure, which JM Financial considers stretched compared to recent years.
JM Financial expects the budget to be more inward-looking, prioritising domestic demand resilience, self-reliance in supply chains, and macroeconomic stability amid global uncertainties. They emphasise the need for a balanced growth framework that supports both capex and consumption, while avoiding sharp reductions in capex that could hinder momentum.
As the government transitions from monitoring fiscal health by 'fiscal deficit as a percentage of GDP' to 'debt as a percentage of GDP' from FY27, JM Financial states this shift may open space for a more expansionary fiscal policy. They believe fiscal prudence will continue, but the pace of consolidation will be shallow, with a base case of a 4.3% fiscal deficit and 54% debt-to-GDP in FY27.
JM Financial expects nominal GDP growth to benefit from the deflationary trend and a change in the base year, projecting 10.5% growth in FY27. Gross borrowing is likely to be higher at Rs 15.5 lakh crore due to redemptions, but net borrowings should remain stable at Rs 11.6 lakh crore. Benchmark yields may harden to 6.75%, risking incomplete monetary transmission even as the RBI injects liquidity.
The anticipated 8th Pay Commission is expected in the next fiscal year, with minimal immediate fiscal consequences and its budgetary impact likely to be reflected more in subsequent years. JM Financial underscores the importance of policy measures to improve women’s workforce participation and continued focus on manufacturing for a stronger ecosystem.
Discussing tax policy, JM Financial notes that India's taxpayer base has grown 2.3x to 116 million by FY25, but the direct tax base remains relatively narrow—covering only about 8.2% of the population and 12.6% of the working-age cohort. While rising income and improved compliance have gradually deepened the tax base, per capita income remains below the no-tax threshold. Income tax return filings grew at 9.3% CAGR over FY14–FY25, aided by digitisation. Further direct tax incentives appear unlikely, but incremental slab rationalisation and wider adoption of the new regime are probable.
JM Financial cautions that market expectations for the Union Budget are measured, with investors focused on policy continuity. The key challenge will be to avoid disruptive tax announcements that could unsettle sentiment or strain the fiscal math. The budget must balance capex and consumption support, avoiding sharp compression in capex below 3% of GDP. It remains to be seen if the government will announce bold reforms before the 2029 elections.
In conclusion, fiscal consolidation is expected to proceed slowly, with the government maintaining a cautious approach to avoid major disruptions. JM Financial’s base case for FY27 is a projected fiscal deficit of 4.3% of GDP and central government debt at 54% of GDP, underscoring the need for prudent fiscal management as India navigates global and domestic challenges.
Emkay Financial Services expects the budget to be a low-impact event for Indian equities. Growth stimulus is already in play and the space for further positive impulses is limited. Some further reforms may be announced, but most possible measures are slowburn and carry only a long-term impact, it said adding the composition of capex spend will be the key factor to watch.
"We expect positive outcomes for railways, defense, auto ancillaries, and EMS, while jewelry, life insurance, and housing finance may take marginal hits," said Emkay. It is overweight on discretionary, industrials and healthcare. It is neutral on technology, while remaining on underweight stance on materials, energy, staples, financials and telecom themes.
Its model portfolio includes names like Eternal, Maruti Suzuki, Dixon Technologies, Shriram Pistons & Ring, Lenskart Solutions, Gravita India, Reliance Industries, Tata Motors, Larsen & Toubro, Mphasis, Craftsman Automation, Hexaware Technologies, Sun Pharma, Bajaj Finserv, IDFC First Bank, RBL Bank, HDFC Bank, Shriram Finance.
Union Budget has to strike a deft balance of sustaining growth momentum and maintaining fiscal consolidation as it also needs to address near-term challenges emanating from unprecedented geopolitical flux, said Motilal Oswal. "Investors do not expect large substantive measures as the FM grapples to address multiple variables – thus setting the base lower for some positive surprise."
Motilal Oswal is positive on L&T, ABB, Siemens, Hitachi, Siemens Energy, KEC, Bharat Electronics, Bharat Dynamics, HAL, Ultratech, JK Cement, Polycab, KEI, Crompton, Titan, PN Gadgil, Niva Bupa, AMCs, RTAs, most HFCs, MFIs, Infra players, IGL, Mahanagr Gas, Gujarat Gas, Petronet LNG, GAIL, Waaree, Premier, NTPC, Tata Power, Acme, NTPC Green, Brigade, Prestige, Sobha, Lodha, Godrej Properties as key stocks and sectors likely to benefit from the budget 2026.