Budget 2026: MOFSL sees defence-led capex growth, says this on PSU bank mergers, divestments

Motilal Oswal Financial Services (MOFSL) said it expected the Union Budget 2026 to place strong emphasis on emerging priority sectors aimed at long-term growth and strategic resilience. It does not expect any populist measures or direct tax code changes this year, given that the government is attempting fiscal consolidation. It, however, sees scope for an increase in capital expenditure (capex) in non-traditional or sunrise sectors, especially defense and allied sectors. 

MOFSL said it sees a clear prioritisation of capital expenditure, which should grow at 10.3 per cent YoY and remain close to 3.1 per cent of GDP, with higher allocations for defence and allied industries, infrastructure-linked manufacturing, pharma, power, nuclear, electronics, critical minerals, and trade tariff-affected labor-intensive sectors. 

At the same time, it feels revenue expenditure will be tightly managed, with limited growth in subsidies and non-essential spending. 

"We model capex of the Centre to be at Rs 12.4 lakh crore in FY27, led by defence expenditure increase of 15 per cent over estimated Rs 1.8 lakh crore spending in FY26," MOFSL said. 

The domestic brokerage expects defence and allied industries to receive greater focus, citing recent momentum in start-ups and the Centre’s formation of a dedicated committee to nurture allied defence capabilities. It said digital technologies, particularly solutions that integrate advanced technology into agriculture, healthcare and related social sectors, are expected to remain key pillars of reform-oriented allocation.

The brokerage said the pharmaceuticals sector, supported by India’s research and development talent pool, is expected to be highlighted as a strategic growth engine. It also said science-led competitiveness, including global capability centres in science, is emerging as a thematic priority.

On the public sector side, MOFSL said it anticipated continued evolution in the government’s disinvestment and PSU strategy, with a shift from outright asset sales towards business revamps and selective stake monetisation. This, it said, included the expected restructuring of IDBI Bank, potential stake changes in LIC and the consolidation of smaller PSU banks to create larger entities similar to SBI and HDFC Bank.

"It appears that they want to revamp the businesses and then stake share with the private sector. IDBI Bank’s share sale will go through by next year. LIC is also likely. There are 12 PSU banks in the government’s radar to work on. They are thinking of merging smaller PSU banks to strengthen the balance sheets. Things are in progress. But to support healthy growth, they look forward to more big banks similar to SBI/HDFC Bank Ltd," it said.