A Pragmatic and Need-of-the-Hour Budget FY26

In a tumultuous global economic backdrop, the Union Budget for FY26 has delivered an optimal solution aimed at augmenting the domestic growth levers of the economy and thereby enabling it to remain the fastest growing major economy in the world. The budget strikes a fine balance between stimulating demand and maintaining macroeconomic stability. A key measure in the Budget is the reduction in income taxes, particularly for low and middle-income taxpayers, which is expected to support consumption. Despite loosening its purse string, the central government has increased its budgetary capex by 10.1% in its enduring efforts to crowd-in the private sector investments. The Budget also maintained its focus on fiscal discipline, with a lower fiscal deficit target of 4.4% of GDP for FY26. Continuing with the broader trend of past few budgets, agriculture and rural development have garnered significant emphasis followed by the MSMEs given their huge contribution towards growth, employment, and exports of the country.

Allocation to the agricultural sector and rural development has increased significantly by 22% and 40% respectively, including import substitution schemes for pulses and oils, and the new Prime Minister Dhan-Dhaanya Krishi Yojana for 100 low-productivity districts. This will boost agricultural productivity through sustainable agriculture practices and increased post-harvest storage facilities, along with facilitating the availability of long-term and short-term credit to states. The Budget has also announced launch of a comprehensive multi-sectoral ‘Rural Prosperity and Resilience’ programme in partnership with states which will help in addressing employment issues in agriculture through skilling, investment, and technology. The key beneficiaries of this programme will be rural women, young farmers, rural youth, marginal and small farmers, and landless families. Focus on parameters such as crop diversification, post-harvest storage facilities, irrigation and availability of credit will likely benefit 1.7 lakh farmers. The budget also envisages to deepen the services of India Post Payment Bank in rural areas to improve financial inclusion and meet the rising needs of Viswakarmas, women, SHGs and MSMEs.

Enhanced credit of Rs 5 lakh through Kisan Credit Card (KCC) will facilitate short term loans for 7.7 crore farmers, fishermen, and dairy farmers. It will provide greater access to institutional credit and reduce dependence on informal lending. Moreover, it will enable farmers to invest in better inputs, modern equipment, and sustainable farming practices and help them overcome immediate financial needs that could arise during crop cycles. Amidst these intended benefits, however, requisite safeguards need to be put in place to prevent over-borrowing and ensure that increased credit translates into real benefits for farmers rather than additional debt burdens. The proposed ‘Grameen Credit Score’ framework for SHG members in rural areas is thus a critical step to serve rural credit optimally. The health and education sectors are also expected to see healthy 12% rises in expenditure, in line with the government’s long-term vision.

The enhanced investment and turnover limits for MSMEs will improve their access to capital and help them achieve higher efficiencies of scale and technology upgradation. Moreover, the significant increase in credit guarantee cover (for Micro and Small Enterprises from Rs 5 crore to Rs 10 crore) will enhance availability of credit for micro and small enterprises. The additional credit availability is estimated at Rs 1.5 trillion over the next five years. Introduction of customized Credit Cards with a Rs 5 lakh limit for micro enterprises is a new initiative and will support the immediate financial needs / working capital requirements of the micro enterprises registered on Udyam portal. Encouraged by the ‘Stand-up India’ initiative, a new scheme is proposed to provide term loans up to Rs 2 crore for first time entrepreneurs from marginalized communities/women marking a step towards supporting these segments in starting and growing their businesses. This would augur well for the overall ecosystem as well. The budget has emphasized reviving labour intensive SME sector such as, toys, footwear & leather, and food processing. This will help generate employment opportunities in these labour intensive sectors.

In its effort to strengthen India’s manufacturing sector and achieve self-reliance, the Budget 2025-26 has come up with a series of measures to boost local manufacturing. At the heart of the budget lies the National Manufacturing Mission, a program designed to give a fresh push to industries of all sizes—small, medium, and large. The government will also set up an Export Promotion Mission, with sectoral and ministerial targets, driven jointly by the Ministries of Commerce, MSME, and Finance. It will facilitate easy access to export credit, cross-border factoring support, and support to MSMEs to tackle non-tariff measures in overseas markets. The government will also launch an Investment Friendliness Index of States this year to incentivise states and further the spirit of competitive cooperative federalism. Continued impetus to the industrial sector through the new announcements, coupled with increased share of manufacturing activity for India, signals strong growth potential. Along with tax rebates, a focused approach will be key to building a resilient and competitive manufacturing ecosystem.

The infrastructure push continues along with several measures to broaden capital expenditure from the Union to States and the private sector. These include a 3-year pipeline of PPP projects, private sector access to the PM Gatishakti data portal, the second phase of the NMP through FY30 with Rs. 10 trn in reinvested capital, the extension of the Rs. 1.5 trn concessional capex loan to States in FY26, and leveraging NaBFiD for partial credit enhancement of infrastructure projects. While there was no change made to capex outlay for either Roads (Rs. 2.7 trn in FY26BE) or Railways (Rs. 2.5 trn in FY26BE), which had hitherto seen large increases, Urban infrastructure received a significant boost with Rs. 1 trn allocated to establish the Urban Challenge Fund. Overall, Capital expenditure of the government is budged to increase by 10.1% (year-on-year) to Rs 11.2 trillion, translating into an annualized growth of 20.3% since the pre-pandemic period (FY19-26BE).

Along with higher budgetary allocations towards capex, also aimed at crowding-in private investments, the budget has tried to simplify the existing governance and compliance culture through some key reform measures.  The budget features three key reforms which will make way for trust-based and principle-driven governance. First, the budget has announced setting up of a high-level committee for regulatory reforms for a review of all non-financial sector regulations, certifications, licenses, and permissions. This is a transformational measure which will help enhance ‘ease of doing business’ by dismantling the lingering constraints of bureaucratic overhang that has impeded business growth. Secondly, Jan Vishwas Bill 2.0 will be tabled in Parliament, which will decriminalise more than 100 provisions in various laws by incentivising voluntary compliance and reducing the fear of excessive enforcement. It is noteworthy that more than 180 legal provisions were decriminalized in the Jan Vishwas Act, 2023.  Third, the new mechanism under the Financial Stability and Development Council (FSDC) will be useful to evaluate the impact of the current financial regulations and formulate a framework to enhance their responsiveness. Thus, it would help the development of the financial sector.

Fiscal prudence shown by the central government since the pandemic has strengthened India’s macroeconomic resilience. Amidst rising global uncertainty, this budget has kept a fine balancing act between demand support and public capex while ensuring fiscal restraint. Fiscal deficit is budgeted at 4.4% of GDP in FY26 (vs. 4.8% of GDP in FY25), in-line with the glide path planned in FY22. The medium-term fiscal policy stance is to keep the fiscal deficit such that the Govt debt to GDP ratio maintains a downward trajectory, for a target of 50% by FY31 (vs. 55% currently). The new fiscal anchor (debt-to-GDP ratio) is expected to provide operational flexibility to the central government while responding to unforeseen developments. The fiscal math for FY26 (including the assumed nominal GDP growth rate of 10.1%) seems to be conservative and has the potential to surprise on the upside.

Overall, the Union Budget for FY26 ticked some of the right boxes for reviving growth. Demandsupport and a capex-push while maintaining fiscal prudence is the hallmark of this budget. Targeted spending and fiscal prudence suggest a strategy designed to sustain growth while keeping macroeconomic stability intact. Despite the accelerated fiscal consolidation, the Budget includes significant income tax relief and increased capital expenditure, along with some narrower policy steps such as funds for the strategic petroleum reserve and a stronger push into nuclear energy. Besides the commendable fiscal math, several initiatives announced in the budget to boost agriculture and MSME segments will continue to support overall economic growth and employment generation. Some of the reform measures announced in the financial and non-financial sector are transformative in nature and could help enticing foreign capital inflows in the medium to long term. Given the challenging global environment, focusing on domestic growth levers is a tactical move. In this regard, the budget has delivered to its fullest extent and it will further bolster India’s macroeconomic stability. At the same, it also maintains the continuity and predictability of steps towards India’s aspiration to become a Viksit Bharat by 2047.

About L&T Finance Ltd. (LTF):

L&T Finance Ltd. (LTF) (https://www.ltfs.com), formerly known as L&T Finance Holdings Ltd., is a leading Non-Banking Financial Company (NBFC), offering a range of financial products and services. Headquartered in Mumbai, the Company has been rated ‘AAA’ — the highest credit rating for NBFCs — by four leading rating agencies. It has also received leadership scores and ratings by global and national Environmental, Social, and Governance (ESG) rating providers for its sustainability performance. The Company has been certified as a Great Place To Work® and has also won many prestigious awards for its flagship CSR project – “Digital Sakhi”- which focuses on women’s empowerment and digital and financial inclusion. Under Right to Win, being in the ‘right businesses’ has helped the Company become one of the leading financiers in key Retail products. The Company is focused on creating a top-class, digitally enabled, Retail finance company as part of the Lakshya 2026 plan. The goal is to move the emphasis from product focus to customer focus and establish a robust Retail portfolio with quality assets, thus creating a Fintech@Scale while keeping ESG at the core. Fintech@Scale is one of the pillars of the Company’s strategic roadmap – Lakshya 2026. The Company has approximately 2.5 Crore customer database, which is being leveraged to cross-sell, up-sell, and identify new customers.