A few years ago, investors watched the budget in hopes of income tax breaks, capital gains concessions or excise tax cuts that could lead to cheaper household items. However, with the Goods and Services Tax (GST) abolished and abolished, income taxpayers moved to a new system and capital gains tax rates standardized, the Budget has very little to offer you as a taxpayer.
Even if you no longer find tax breaks in the budget, it could contain announcements that indirectly affect your investments. Here are five key takeaways from Budget 2026 that investors need to pay attention to.
Deficit, debt and bond yields
If you believe that the interest rates on your loans and debt investments are set by actions of the Monetary Policy Committee (MPC), then you do not have the complete picture. For bond investors, market interest rates are more important than official repo rates.
Although the MPC cut repo rates by 125 basis points last year, market yields have barely changed. The 10-year G-Sec (government bond) yield, which was 6.8 percent in January 2025, is now at 6.7 percent, down just 10 basis points. For five-year G-Secs, it fell from 6.6 percent to 6.4 percent. The yield on the five-year AAA-rated corporate bond, which was 7.7 percent, is now 7.5 percent. This shows that market interest rates are not solely determined by repo rates (which are simply the interest rate at which banks borrow money from the RBI overnight).
Market returns are determined by the demand and supply of bonds in the market. The government is the largest borrower in the Indian bond market. Therefore, the supply and demand of G-Secs sets the lower bound on the yields of all other bonds.
The Budget provides the first official estimate of how much the central government plans to borrow in a given financial year. The size of the budget deficit determines how much borrowing needs to be taken out. The Center divides its planned borrowings into term securities, treasury bills, small savings schemes and other sources that determine the demand and supply of each instrument.
Therefore, as an investor, you should pay attention to four budget numbers that influence your debt returns:
* Whether the fiscal deficit target for FY26 will be achieved
* Fiscal deficit target in absolute and percentage terms for FY27
* Amount of borrowing required to cover the FY27 deficit
* Composition of loans in terms of market and non-market loans.
In the February 2025 Budget, the Center projected a fiscal deficit of ₹15.68 lakh crore for FY26. Based on an estimate of nominal GDP growth of 10.1 percent, the fiscal deficit target was set at 4.4 percent. Given low inflation, nominal GDP growth is expected to be just 8 percent in FY26. It therefore remains to be seen whether this deficit target will be achieved despite a lower denominator.
Last year, the Center had hinted at a shift from a fiscal deficit target to a public debt-to-GDP target. The bond markets will also be watching whether this leads to a higher or lower budget deficit. The market expects the Budget to set the fiscal deficit target for FY27 at 4.2-4.3 percent. If it goes higher, bond yields will rise as the market accommodates a higher supply of bonds. If it is lower, bond yields/market interest rates will fall. The Centre’s total borrowing was forecast at Rs 15.6 lakh crore and market borrowing at Rs 11.53 lakh crore in FY26.
If borrowings are significantly higher in FY27, this would again be a sign that market yields are rising. An increase in market yields can cause the price of your existing bonds to fall. But it will mean higher returns from new bonds and deposits you invest in next year.
Capital expenditures by sector
After the Corona crisis, when the private sector took its time to complete its investment plans, it was the central government that supported the investment arm of GDP with its increasing capital expenditure.
Between FY20 and FY26 (Budget Estimates), the Centre’s capital expenditure and grants for capital creation increased from ₹5.2 lakh crore to ₹15.5 lakh crore, increasing from 2.6 per cent of GDP to 4.3 per cent. In recent years, the government (Centre plus states) accounted for about 25 percent of the total capital investment in the economy (gross fixed capital formation), while households contributed 42 percent (mainly through housing, vehicles, etc.) and private sector companies contributed 33 percent.
However, from now on it is likely that the central government will have to slow the growth of its capital expenditure. First, due to the generous cuts in both income tax and GST, the Centre’s revenue will now grow at a slower rate than in the five years post-Covid. Second, the majority of government capital spending goes to sectors such as roads and railways, where spending options currently appear to be limited. Third, spending on wage commissions and social benefits is expected to drive up revenue spending starting in fiscal year 2027. Capital spending could be constrained by the need to meet deficit and debt-GDP targets.
In FY26, the Center allocated ₹11.2 lakh crore for its own capital expenditure and supplemented the resources of PSUs (public sector undertakings) by ₹4.31 lakh crore to fund their capital expenditure. Of the ₹11.2 lakh crore, ₹2.72 lakh crore was allocated for roads and highways, ₹2.52 lakh crore for railways, ₹1.8 lakh crore for defense services and ₹37,623 crore for housing and urban affairs, while ₹1.7 lakh crore was transferred to the states.
In the coming budget, investors need to look out for an expansion in the overall investment amount as well as changes in individual sector allocations. The FY27 numbers are worth keeping an eye on to see whether the Center wants to maintain its capex or now looks to hand over the baton to the private sector.
PLI and Customs Changes
With Indian industry under threat from tariffs and trade wars, the Budget could try to neutralize these threats through countermeasures against tariffs and production-linked incentives (PLIs). PLIs are capital grants paid to private companies that set up facilities for industrial products that can serve as import substitutes or diversify India’s export basket. PLIs in sectors like electronics have proven quite successful in increasing domestic value addition for imported items.
The attached table shows the major PLIs that received allocations in the previous Budget. Investors need to look out for higher allocations to these existing segments as well as new PLI announcements in the upcoming Budget. While PLI allocations may seem small, they make a significant difference to the fortunes of individual companies as they are free capital grants from the government to just a few players in a sector.
While most budget watchers are sticking with the finance minister’s speech, proposals with important implications for industry often lurk in the small print. This time, with the US breathing down India’s neck over tariffs and India busy signing free trade agreements with numerous trading blocs (Eurozone, UK, UAE), tariff adjustments in the Budget will make for interesting reading. The items selected for tariff adjustments will reflect sectors where India is willing to reduce trade barriers for friendly trading partners, as well as those where tariff barriers are being re-imposed in retaliation against hostile trading partners. Customs declarations with explanations are submitted separately with the budget documents.
Wage commission effect
Every ten years, the central government sets up a central pay commission to decide on salary increases for government employees. Given that these changes only occur every ten years, they tend to result in significant increases in the compensation of state employees. The central government directly employs about 36,000 people.
Public sector companies and state governments then take inspiration from the Pay Commission to revise their own salary structures, which in turn set the floor for private sector salaries. Therefore, salary commission bonuses typically ultimately impact all employees.
The Seventh Pay Commission, introduced in January 2016, revised the basic salary for central government employees by an adjustment factor of 2.57 (a 157 percent increase in basic salary). The minimum basic salary was increased from ₹7,000 to ₹18,000 per month, with the average increase in wages, allowances and pension estimated at 23.5 percent. The Eighth Pay Commission was constituted in October 2025 and is tasked with submitting its report within 18 months. However, the recommendations will come into force from January 1, 2026.
The Center may choose to provide these payments in the upcoming budget. If so, this would be reflected in the institution’s revenue expenditure, which was budgeted at ₹8.52 lakh crore in FY26. Establishment costs already accounted for 17 percent of the Center’s total budget expenditure in FY26. Therefore, a significant increase in this number – even if it is beneficial for government employees and consumer stocks – could have a negative impact on the budget deficit.
Customs on gold/silver
With foreign portfolio investors (FPIs) on a selling spree, finfluencers seem to be demanding budgetary concessions on capital gains tax, especially for FPIs. It is difficult to say whether this will happen.
However, as recent price increases have led to a surge in popularity of gold and silver exchange-traded funds, there are concerns that bullion imports could widen the country’s current account deficit and increase pressure on the rupee. Imports of precious metals have surged since the Center cut customs duty on gold and silver from 15 per cent to 6 per cent in the 2024 Budget.
Yes, reintroduction of higher customs duties will inflate the Centre’s sovereign gold bond obligations. But it might conclude that the trade-off is worth it if imports bring in higher tariff revenues and curb the gold/silver rush.
The author is a contributing editor
More of this
Published on January 29, 2026