Union Budget 2026: Balancing Growth, Fiscal Discipline & Middle-Class Relief

Gaurav Bhagat, Founder & Managing Director, Consortium Gifts

As India prepares for the Union Budget 2026, anticipation is running high about how Finance Minister Nirmala Sitharaman will allocate an expected ₹70 lakh crore (₹70 trillion) in government spending.

This budget, the ninth consecutive budget for Sitharaman and the second full budget for the Modi government in its third term, is a critical one.

The economy is expected to register a growth rate of 7-7.5% in FY 2026-27, but the challenges of global uncertainties, climate change, and domestic issues imply that the government needs to strike a balance between its ambitious plans for growth and its fiscal responsibility.

The trends and expectations suggest that the budget will strike a balance between heavy outlays on infrastructure and small-scale businesses and the middle class, with a focus on education, MSMEs, and startups.

Infrastructure and Investment Drive

Investments in infrastructure will once again take center stage as the “engine” of India’s growth strategy. The upcoming budget is widely expected to build on last year’s momentum by increasing spending on highways, railways, ports, and urban development in the double digits.

The government is also likely to continue support for state-level infrastructure. In previous budgets, it introduced special 50-year interest-free loans to states for capital projects; this year, that scheme may be expanded with an allocation in the range of ₹1.5–1.75 lakh crore for state infrastructure loans.

Such moves ensure that the infrastructure boom isn’t confined to the central government’s projects; states get funds to upgrade local roads, public transit, and industrial hubs, spreading growth nationwide.

We might witness specific allocation of funds for urban renewal (building on last year’s ₹1 lakh crore Urban Development Challenge Fund) to transform cities into engines of economic growth along with emphasis on rural infrastructure.

Education, Skills, and Employment

Continuing from last year’s historic allocation of a record ₹1.28 lakh crores, Budget 2026 is expected to be the “next building block” in the education sector, with a focus that gradually shifts from access to quality outcomes and employability.

Though India has made a substantial increase in the number of enrollments in higher education, with over 43 million enrollments, the employability gap continues, with only 50-55% of engineering pass-outs being employable, thus requiring a “curriculum shift” to cater to market needs.

In this regard, the budget is expected to support the Skill India mission, increase the number of 50,000 Atal Tinkering Labs, and offer tax support to MSMEs and women apprentices to promote “learning by doing.”

Furthermore, through the execution of the ₹500 crore Center of Excellence for AI and the establishment of green skill labs, the government aims to empower the youth to transform from technology consumers to producers, with the India AI Mission aligning with the increasing demands of digital and climate-focused sectors.

MSMEs: Empowering the “Second Engine of Growth”

The MSMEs in India contribute 30% of the GDP and employ 120 million people, but they are facing a credit deficit of ₹30 lakh crores, and 24% of their total funding requirement is being left unmet.

Though 11 million jobs were created in 2023-24, more than 90% of the businesses are still unorganized, stuck in a vicious cycle of high-interest informal borrowing at 24-36% per annum.

Budget 2026 must break this cycle: collateral-free loans up to ₹1 crore with interest rates not exceeding 6-7%, real-time credit assessment based on GST returns, and mandatory payment compliance.

MSMEs aren’t failing due to inefficiency; they’re failing because the financial infrastructure treats them as perpetual liabilities rather than engines of inclusive growth. Without decisive budget action, we’ll watch millions of viable businesses silently exit the formal economy. 

Tax Reliefs and Reforms

Tax policy is set to remain a closely watched element of Budget 2026 for both individual taxpayers and businesses, particularly after last year’s sweeping overhaul of the personal income tax regime that made income up to ₹12 lakh effectively tax-free under the new system.

In view of last year’s relief, large-scale tax reforms are unlikely to happen in the current year, although some rationalization steps are expected. Among the most pressing demands is an increase in the limit of the home loan interest deduction allowed under Section 24(b) of the old taxation system, which is now set at ₹2 lakh, but which trade associations claim is no longer commensurate with the current prices of properties and rates of interest; this may be raised to ₹3-4 lakh to ease EMI payments for first-time home buyers and middle-class families.

There are also demands to raise the limit of the investment deduction under Section 80C from the current ₹1.5 lakh or to introduce a separate deduction for the principal repayment of home loans.

Conclusion: A Balancing Act for Long-Term Growth

The Union Budget 2026 comes at a time when the economic aspirations of India are large, but so are the constraints. The question is: How will the government use its massive budget to address its priorities? Based on early signals, the answer may lie in striking a balance.

A budget that will be heavily focused on the future, with a strong emphasis on infrastructure, education, and technology, and also keeping in mind the fundamentals of a healthy economy.

The policy directions point to a focus on long-term competitiveness rather than short-term politics, and the Finance Minister is likely to focus on spending that promotes growth rather than one-off handouts.

The key sectors of education, MSMEs, and startups are likely to receive a helping hand, which is in line with the plan to empower human capital and entrepreneurship.

At the same time, further development in infrastructure and some tweaks in taxation could help sustain the recovery of these sectors and help them take their place in the world.

Of course, there could be a few surprises in the budget, but the overall expectations are clear: fix the foundations (roads, railways, power, and cities), skill the workforce, support small businesses, and encourage innovation, all of which are under the overarching theme of economic stability.