Budget 2026 Analysis: India’s Fiscal Balancing Act Between Growth and Fiscal Discipline

The upcoming Union Budget 2026, to be presented by Finance Minister Nirmala Sitharaman on February 1st, faces the complex challenge of balancing immediate fiscal constraints with long-term strategic growth, as industries unanimously call for increased R&D funding to address India’s low investment of 0.7% of GDP and enhance global competitiveness.

Key expectations include granting nationwide infrastructure status to the hospitality sector to improve financing, rationalizing the GST misalignment between EVs (5%) and charging services (18%), and implementing startup-friendly reforms like ESOP tax deferrals and easier access to capital. Simultaneously, the government must navigate revenue pressures, with potential excise duty hikes on fuel, while addressing critical issues such as the housing affordability crisis, preparing Indian exports for mechanisms like the EU’s Carbon Border Adjustment Mechanism (CBAM), and stimulating domestic consumption without exacerbating inflation, making this budget a pivotal test for India’s transition from a consumption-led to an innovation-driven economy.

Budget 2026 Analysis: India’s Fiscal Balancing Act Between Growth and Fiscal Discipline  

As Finance Minister Nirmala Sitharaman prepares to present the Union Budget on February 1, 2026, India stands at a critical economic crossroads. The budget, scheduled for a rare Sunday presentation, must reconcile conflicting pressures: immediate fiscal constraints against long-term strategic ambitions. Industry demands pouring in from every sector reveal a nation striving to transition from a consumption-led economy to an innovation-driven global power, while simultaneously managing populist expectations in a still-recovering economic landscape. 

The R&D Paradox: Global Ambitions vs. Domestic Realities 

A striking consensus emerges across disparate industries: the urgent need to bolster research and development investment. India currently allocates a mere 0.7% of its GDP to R&D, significantly trailing global peers like China, Israel, and the United States. This underinvestment threatens to undermine the “Make in India” vision, leaving the nation perpetually playing catch-up in technology adoption rather than leading in innovation. 

Industry veteran Dr. R.G. Agarwal, Chairman Emeritus of Dhanuka Agritech, articulates the concern bluntly: “If we genuinely want scientific progress and global competitiveness, R&D funding has to increase”. This sentiment resonates from electric vehicles to pharmaceuticals, where leaders call for restoring strong tax incentives for private-sector research. 

Pharma leaders specifically advocate for increasing R&D deductions to 200% and extending patent box benefits to all income streams from innovations. Similarly, the EV sector seeks increased R&D expenditure to promote innovations in new energy materials and high-performance battery components. 

Fiscal Tightrope: Revenue Pressures and Strategic Taxation 

The government faces mounting revenue challenges that may dictate its fiscal choices. With the FY26 revenue run-rate lagging budget estimates and a goal to potentially lower the fiscal deficit target to 4-4.2% of GDP in FY27, tough decisions loom. 

Table: Key Budgetary Pressures and Industry Demands 

A particular flashpoint is the petroleum sector, where JM Financial anticipates a possible excise duty hike of ₹3–₹4 per litre on petrol and diesel. With Brent crude prices remaining subdued around $65 per barrel until at least late 2026, the government has room to increase duties without immediately passing costs to consumers. However, this would significantly impact downstream oil marketing companies, with every ₹1 per litre change in margins affecting HPCL’s EBITDA by about 16.6%. 

Infrastructure Status: The Missing Recognition for Tourism and Hospitality 

Among the most vocal demands comes from India’s hospitality sector, which contributes 7-8% to GDP and supports 46.5 million jobs (projected to reach 64 million by 2035). Despite this economic significance, the industry lacks comprehensive infrastructure status, limiting access to long-term, affordable financing. 

The previous budget extended infrastructure benefits to hotels in 50 select destinations, but industry leaders demand nationwide recognition. As Nikhil Sharma of Radisson Hotel Group notes, such status would “unlock long-term financing, improve capital efficiency and accelerate quality development beyond metros”. The sector also seeks GST rationalization, restoration of input tax credit, and stronger Centre-state coordination, with some suggesting tourism be added to the concurrent list to address fragmented policymaking. 

Startups and Deep Tech: Nurturing the Innovation Ecosystem 

India’s startup ecosystem presents a paradox of thriving entrepreneurship hampered by structural constraints. Startups seek ESOP tax reforms that would defer taxation until liquidity events rather than at vesting, easing financial pressure on employees and improving talent retention. Space tech startups, in particular, request faster clearances for importing critical components and early government purchase orders to help them scale from validation to commercial operations. 

Infosys co-founder Kris Gopalakrishnan suggests a compelling idea: nil capital gains tax for investments held 8 years or more in deep-tech startups, recognizing their longer gestation periods. This “patient capital” approach could channel investments into sectors requiring sustained funding before yielding returns. 

Electric Mobility: Aligning Policy with Adoption Goals 

The electric vehicle sector highlights a critical GST misalignment that hampers adoption: while EVs attract 5% GST, charging services are taxed at 18%. This discrepancy raises operating costs and undermines the financial sustainability of public charging infrastructure. The industry seeks rationalization to 5% for charging services alongside sales-based subsidies for startups rather than upfront incentives. 

Healthcare: Bridging the Ambition-Reality Gap 

Healthcare leaders acknowledge the near 10% increase in allocations in the previous budget but note India’s public health spending remains below 2% of GDP, short of the National Health Policy’s 2.5% target. With medical inflation at 11.5-14% and 45-50% of healthcare expenditure still out-of-pocket, the sector seeks a “booster dose” of fiscal support. 

Priorities include domestic manufacturing incentives for advanced medical equipment, mental health funding beyond the current 1% of health allocations, and expansion of insurance coverage. The diagnostics sector specifically highlights an inverted duty regime that makes importing finished products cheaper than sourcing raw materials locally, undermining “Atmanirbhar Bharat” goals. 

Global Competitiveness: Preparing for Carbon-Conscious Trade 

Beyond domestic concerns, Budget 2026 must prepare Indian industry for emerging global realities. With the EU’s Carbon Border Adjustment Mechanism (CBAM) taking effect, carbon intensity transforms from a sustainability metric to a trade parameter. Industry experts like Yashodhan Ramteke of EcoGuard emphasize the need for a well-structured domestic carbon pricing and measurement ecosystem to reduce CBAM exposure and help Indian exports remain competitive in carbon-constrained markets. 

The Way Forward: Strategic Choices for a Defining Budget 

As Sitharaman prepares her ninth consecutive budget, she faces perhaps her most complex balancing act yet. The budget must simultaneously: 

• Stimulate consumption without exacerbating inflation 

• Boost investment while maintaining fiscal discipline 

• Support traditional sectors while accelerating India’s transition to a knowledge economy 

• Address immediate affordability crises (particularly in housing) while building long-term competitive advantages 

The common thread across sectoral demands is a call for policy stability and predictability. As Sameer Gupta of EY India notes, businesses seek “a strong commitment to tax certainty and streamlined compliance processes”. Whether through rationalizing India’s 37 different TDS rates, providing clearer guidelines on cryptocurrency taxation, or establishing stable frameworks for international taxation, certainty itself becomes an economic stimulus. 

Budget 2026’s legacy may ultimately be determined by how effectively it translates India’s demographic dividend into an innovation dividend. As Kiran Mazumdar-Shaw emphasizes, strategic investments in bio-manufacturing, scientific capacity building, and regulatory science are crucial for moving up the value chain. The budget presents an opportunity to shift from celebrating India’s position as the world’s fastest-growing large economy to building the foundations that will sustain this growth through the coming decades. 

The decisions taken on February 1 will reveal whether India’s economic vision extends beyond cyclical growth to structural transformation—whether the ambition is merely to keep pace with global trends or to eventually set them.