While budgets are actually financial statements of the government, there are announcements of several measures which tend to affect different sectors to bring about changes in the pace of activity. In fact every measure that is invoked at the taxation level provides incentive for an economic activity like consumption or expenditure. Also there are several policy changes made which are related to the expenditure outlays of the government. Therefore, in a way there are far reaching implications for all announcements made in the Budget. The impact hence can be examined.
First, growth impetus has been stark, with focus on sectors such as MSMEs, rare-earth, data centres, etc. Given that the MSME sector has been affected the most by the recent ongoing tariff issue with US, the creation of a fund for ₹10,000 crore and the other credit guarantee schemes will help them to a large extent. Also the Budget has made allocations for several freight corridors which will help in forging backward linkages with different sectors besides strengthening the State economies. Interestingly the focus on waterways is important as this is probably the first time that we are talking of leveraging this potential.
Second, investment is given a push by the capex of the government. This has increased to ₹12.2 lakh crore which is significant. The government has been doing the heavy lifting for quite some time now and there is always the hope that private investment will follow suit. It has been seen that the overall investment announcements in the first three quarters has been good giving an indication that the cycle is turning around. The prop being provided by the government will help to bring about a further increase in overall investment in the country. There can be positive impetus provided to industries such as steel, cement, engineering in particular.
Third, at the retail end there were expectations of concessions on the taxation front though there were moderated by the fact that the bulk of the tax benefits had been delivered last year. Here the Budget has made some moves on easing the tax environment though there has not been any direct benefits on taxation. The households may be disappointed in not getting any benefit on interest on bank deposits, which seemed to be very much on the cards. But this may be tackled in subsequent Budgets.
Fourth, the overall borrowing programme has been reined in at ₹11.7 lakh crore in net terms which is similar to that of FY26. This means that there will be less pressure on the bond market though admittedly the state borrowing programme will also be a consideration for bond yields. However, the gross borrowing programme is high at ₹17.2 lakh crore which can be a concern for the market. But this is mainly due to high redemption of ₹5.5 lakh crore. It may be expected that in future years too, there will be this issue of high redemptions which will push up the gross borrowing. There is evidently need to lower the fiscal deficit ratio. As there is the goal of lowering it to 50 per cent by 2030, we can expect some acceleration in the reduction of this ratio in the next few years.
Fifth, indirect taxes in the form of GST being outside the purview of the Budget, the inflation impact can be looked at from the point of view of the fiscal deficit and customs tariffs. Here, the overall impact will be more in the downward direction as the tariffs have been lowered as part of the rationalisation process. Also with the deficit being under control at 4.3 per cent, chances of demand-pull inflation are lower from the government side. It is fortuitous that the economy is still operating at lower than the potential rate which will eschew this trigger.
Sixth, the capital market would probably be less excited about the Budget due to the increase in the STT on F&O. From the point of view of the government, it can be seen more as a measure to restrain the retail investor from venturing into this segment as there have been several instances of them making large losses. The more clairvoyant investor who is the long term one may probably not really mind this tax. The Budget assumes that this will not really push the market back as can be seen by the higher receipts expected from STT from ₹63,670 crore to ₹73,700 crore.
Seventh, the Budget has again spoken of revitalising the corporate bond market. One of suggestions that has been made in the past was allowing for market makers who can provide buy-sell quotes just as is there in the Gsec market. This is something the Budget talks of, which will help in improving the depth in the market. The challenge for this market has been the absence of a vibrant secondary market as very often there are either no buyers or sellers for a security in this segment. The issue is that most buyers are long term investors who buy and hold the paper and are not active in the secondary market.
Municipal bonds
Eight, the Budget once again is trying to nudge municipals to issue bonds so that this segment develops and eases pressure on State fiscal balances. Also issuance of bonds leads to better financial discipline among such entities as they become more responsible for their actions. The incentive of ₹100 crore on bonds of ₹1,000 crore and above issued should encourage them to borrow from the market.
The Budget has hence taken a medium term look and provided incentives where required as part of the reforms process. Unlike FY26 where there was something to cheer for households, there may not be too much directly done for this segment. But there isn’t anything negative as such in the Budget and hence can be considered as a Pareto optimal situation, which in economics is defined as a state where no one is worse off, but some better off. Clearly the emerging sectors as rare-earths, data centres, AI , infrastructure, etc., will continue to hog attention in future Budgets too.
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