Budget 2026 vs Budget 2025: What Changed for Equity Markets

Finance Minister Nirmala Sitharaman presented India’s Union Budget 2026 on 1 February 2026. The Budget builds on the fiscal consolidation path outlined in Union Budget 2025 while introducing measures aimed at recalibrating trading activity and sharpening sectoral priorities.

Compared to Union Budget 2025, which focused on supporting consumption through personal income tax relief and sustained infrastructure spending, Union Budget 2026 places greater emphasis on manufacturing self-reliance, curbing excessive speculative trading, and prioritising strategic capital expenditure. At the same time, it reflects more moderate economic growth projections.

The differences between the two Budgets highlight evolving policy priorities and their implications for investors. While markets witnessed short-term volatility following announcements related to trading taxes, the broader framework of fiscal discipline and continued capital expenditure provides structural support for equities.

Fiscal Prudence Evolution

Budget 2026 reinforces the government’s commitment to fiscal consolidation. The fiscal deficit target for FY2026–27 (Budget Estimate) is set at 4.3% of GDP, a marginal improvement from the 4.4% Revised Estimate for FY2025–26.

This continues the glide path outlined in Budget 2025. Revenue buoyancy is expected to be supported by steady growth in direct tax collections and robust GST revenues. Gross market borrowings are projected to moderate slightly compared to the previous year, easing pressure on the government securities (G-Sec) yield curve.

Lower borrowing requirements could contribute to a relatively stable interest rate environment, which tends to benefit rate-sensitive sectors such as real estate and non-banking financial companies (NBFCs).

In contrast, Budget 2025 focused more heavily on supporting domestic demand and accelerating infrastructure investment. Capital expenditure allocations were significantly expanded to strengthen economic momentum.

The continued emphasis on fiscal prudence, alongside sustained capital spending, signals increasing maturity in India’s fiscal management. Over time, a stable debt-to-GDP trajectory can improve sovereign perception and support steady institutional flows into Indian equities.

Taxation Reforms: Trading Friction

One of the notable changes in Budget 2026 relates to higher Securities Transaction Tax (STT) rates on derivatives trading. The revisions aim to moderate excessive activity in the futures and options (F&O) segment and encourage more disciplined market participation.

India’s derivatives turnover has expanded rapidly in recent years, particularly among retail participants. Regulatory data has consistently shown that a large proportion of retail F&O traders incur losses. By increasing transaction costs in this segment, the government appears to be discouraging speculative leverage while promoting longer-term investing behaviour.

Budget 2025, in contrast, did not introduce such measures. Instead, it prioritised personal tax relief, higher rebate thresholds, and improved TDS limits to stimulate consumption and enhance disposable income.

Budget 2026 also includes adjustments such as higher deductions for senior citizens and revised tax collection thresholds in select areas. While these changes support household finances, higher derivative trading costs may impact frequent traders and brokerage volumes in the near term.

Overall, the taxation shift suggests a policy tilt towards strengthening cash equities and long-term investment channels rather than high-frequency leveraged trading.

Capital Expenditure Continuity

Capital expenditure remains a central pillar of the government’s strategy. For FY2026–27, capital outlay is projected to rise meaningfully compared to the previous year, maintaining infrastructure-led growth momentum.

The continued push into roads, railways, logistics, and urban development is expected to generate multiplier effects across sectors such as cement, steel, engineering, and construction.

Budget 2025 laid the foundation with record capital allocations. Budget 2026 builds on this base by emphasising execution efficiency, viability gap funding, and monetisation strategies through infrastructure investment structures.

Sustained public capex also acts as a catalyst for private sector investment, supporting the broader capital expenditure cycle. Over the medium term, this trend strengthens earnings visibility for infrastructure-linked companies and industrial manufacturers.

Read more: Budget 2026 Capex vs Consumption

Sectoral Deep Dive

Infrastructure and Logistics

The 2026 Union Budget allocates Rs 50,000 crore for the creation of an Urban Development Fund aimed at supporting city development. It also proposes an Urban Challenge Fund of Rs 50,000 crore to further encourage structured urban growth initiatives.

Additionally, infrastructure development will be strengthened through Rs 1.5 lakh crore worth of Public-Private Partnership (PPP) projects expected to be awarded in 2025. These measures are anticipated to positively impact companies such as IRB Infrastructure and KNR Constructions.

Multi-Modal Logistics Parks (MMLPs), with a total proposed investment of Rs 1 lakh crore, are also planned to enhance supply chain efficiency and logistics infrastructure.

Manufacturing & MSME

The Union Budget 2026 introduces eight support measures for SMEs, including:

• The creation of a Rs 10,000 crore Fund-of-Funds to support SME growth,
• Enhancements to the Trade Receivables Discounting System (TReDS), and
• The development of 100 ‘legacy cluster’ projects.

In addition, Rs 5 lakh crore in credit guarantees extended in 2025 is expected to further facilitate SME expansion.

Mid-cap companies such as GMM Pfaudler and Elecon Engineering are well-positioned to benefit from SME growth, supported by their relatively attractive valuations.

The relaxation of restrictions on IPOs prior to full project completion is expected to significantly increase the number of companies accessing capital markets.

Financial Services

The 2026 Union Budget includes measures such as funding for a Banking Reforms Committee, transitioning NBFCs to a rationalised licensing regime, and the establishment of a Corporate Bond Exchange facility. It also continues refinements to the 2025 FDI reforms, which allow 100% foreign direct investment in insurance and infrastructure.
 

Banks such as HDFC Bank and ICICI Bank are expected to benefit from changes to Priority Sector Lending (PSL) norms. These include reducing caps related to foreign portfolio investments and allocating up to 10% of the individual investment cap toward corporate bonds, thereby enhancing debt market participation.

New Themes Emerging

Budget 2026 sharpens focus on strategic sectors such as biopharma, semiconductor design, advanced manufacturing, and textiles. Production-linked incentive (PLI) extensions and targeted sectoral incentives signal long-term policy backing for technology-driven manufacturing.

Compared to Budget 2025, which prioritised broad-based capex and demand recovery, the 2026 framework reflects a more targeted industrial strategy aimed at enhancing global competitiveness.

Equity Market Dynamics

Markets initially reacted with volatility following the Budget announcements, particularly around taxation measures affecting derivatives. However, the broader macro narrative of fiscal discipline and sustained capital expenditure remains supportive for long-term equity performance.

Valuations remain elevated in select segments, particularly in infrastructure and defence-linked themes, while consumption-driven sectors may see relatively moderate growth momentum in the near term.

Earnings recovery expectations for FY2027, combined with a stable interest rate outlook, could provide support for large-cap indices. Institutional investors are likely to remain selective, with preference for companies demonstrating earnings visibility and balance-sheet strength.

Implications of Strategic Investment

For high-net-worth investors, diversification beyond derivatives into infrastructure-focused funds, structured credit opportunities, and selective SME participation may offer long-term growth potential.

Retail investors may continue to favour systematic investment plans (SIPs) and diversified equity funds, which provide disciplined exposure to India’s structural growth story.

Budget 2026 reinforces India’s positioning as a long-term growth market. While short-term volatility is inevitable, the combination of fiscal consolidation, capex continuity, and sectoral targeting provides a constructive framework for sustained equity participation.

*The article is for information purposes only. This is not investment advice.