Union Budget 2026: Continuity, Corrections, and Change beyond the Consumption Push of 2025

 

Union Budget 2026: Continuity, Corrections, and Change beyond the Consumption Push of 2025

ABSTRACT

Union Budget 2026 represents a structural shift in India’s macro-policy direction following the demand-centric reforms of Budget 2025. While Budget 2025 increased disposable incomes through income tax simplification and GST relief, Budget 2026 is expected to prioritize capacity building, employment generation, and long-run competitiveness. The budget focuses on fiscal consolidation, infrastructure expansion, defence modernization, green energy investment, and enforcement of timely MSME payments. Structural challenges such as delayed invoices, high credit costs, global uncertainty, and sectoral volatility—particularly in textiles and gems—create urgency for targeted intervention. This paper analyzes the continuity and divergence between Budget 2025 consumption stimulus and Budget 2026 capability-enhancing measures and argues that successful implementation could strengthen India’s growth trajectory through multiplier effects in jobs, exports, and manufacturing productivity. MSME liquidity discipline and public capex are positioned as core transmission channels for inclusive growth.

 

KEYWORDS

Union Budget 2026; Budget 2025 Reforms; Income Tax Simplification; GST Rationalization; Fiscal Policy; Fiscal Deficit; MSMEs; 45-Day Payment Rule; Infrastructure Capex; Defence Manufacturing; Green Energy; Solar and EV Incentives; Export Competitiveness; Public Investment Multiplier; India Economic Growth Strategy.

 

1. Introduction

Union Budget 2026, scheduled for February 1, 11 AM, represents the second consecutive full-year reform agenda following India’s 2025 pivot toward consumption-led expansion.
Budget 2025 raised disposable income, reduced GST on essentials, simplified taxation, and aimed at demand revival after subdued consumption and inflation moderation.

Budget 2026 is expected to extend the consumption thrust, but with sharper emphasis on:

• Fiscal consolidation toward a 4.4% deficit
• Manufacturing stimulus
• MSME liquidity and compliance reform
• Sectoral capex: defence, railways, and green energy
• Execution over headline announcements

Thus, Budget 2026 marks a shift from demand stimulation to capability-building, especially in MSMEs, infrastructure, and sustainability.

 

2. Background: Budget 2025—Reforms & Economic Direction

2.1 Tax Policy Shift

Budget 2025 centered on simplification:

• New regime became default
• Tax-free income threshold raised to ₹12 lakh (₹12.75 lakh with standard deduction)
• TDS/TCS reduced and compliance rationalized
• GST cut for essential FMCG

Revised Income Tax Slabs (FY25-26, New Regime)

Income (₹ lakh)	Tax Rate
0–4	Nil
4–8	5%
8–12	10%
12–16	15%
16–20	20%
20–24	25%
Above 24	30%

Demand sensitivity estimates projected 0.2–0.3% GDP uplift from higher post-tax income.

2.2 GST Rationalization

• Fast-moving essentials from 18% → 5%
• TCS/TDS compression for small dealers

2.3 Growth Transmission

Budget 2025 produced short-run demand push benefiting:

• FMCG & retail
• Lower-income households
• MSMEs supplying consumer goods

However,

• Consumption stimulus needed reinforcement
• Capex-led job generation required in FY26
• MSME stress remained unresolved

 

3. Research Gap & Budget 2026 Motivation

Unresolved Challenges after Budget 2025

Issue	Persistence into 2026
High private capex hesitation	YES
MSME invoice delays	YES (even stricter compliance)
Energy security gaps	YES
Defence import dependence	YES
Logistics inefficiencies	YES
Tax system friction despite simplification	PARTLY

Budget 2026 therefore must convert early demand revival into sustainable production & investment growth.

 

4. Key Focus Areas Expected in Budget 2026

4.1 Fiscal Framework

• Target deficit 4.4% of GDP
• Higher tax buoyancy from formalization
• Shift from consumer subsidies → production incentives
• Realignment of capital expenditure from highways towards railways, defence, and energy

4.2 Defence & Strategic Manufacturing

• Rising border tensions
• National security technology gaps
• Deepened Atmanirbhar Bharat
• Higher R&D pipelines with private co-development

4.3 Infrastructure

• Railways allocation expected ₹2.7–2.9 lakh crore (+10-12%)
• Multimodal logistics parks
• Rolling stock modernization
• Dedicated freight expansion

4.4 The Green Energy Pivot

• Storage incentives (battery + pumped hydro)
• Rooftop solar scale-up
• Push for:
• Smart grids
• Domestic EV supply chain
• Carbon credit market pilots

4.5 MSMEs

The centrepiece of Budget 2026.

 

5. MSME Analysis: The Structural Challenge

5.1 Sector Profile

• 25 crore workers engaged
• 45% of exports (up from 39% in 2021)
• #1 job creator post-farm sector

5.2 Problems Intensified Post-Budget 2025

Despite tax relief and GST tweaks, MSMEs faced:

1. Delayed payments
2. Costlier compliance under the 45-day invoice rule
3. Working capital shortages
4. Textile, leather, and gem exports losing competitiveness
5. Tight credit from banks and risk-averse NBFCs

5.3 The 45-Day Rule Paradox

• Introduced to protect MSMEs
• Mandated invoice settlement within 45 days
• But large buyers responded by pushing MSMEs out of vendor lists
• Tax disallowance penalties for non-compliant firms created fear and liquidity stress

 

6. Proposed Budget 2026 Solutions

6.1 Financial Support

Challenge	Remedy
Payment delays	Digital enforcement + escrow mechanisms
GST refund delays	Time-bound automated refund dashboards
High credit cost	SIDBI blended finance + NBFC-backed invoice loans
Tariff shocks	Duty drawback/PLI for textiles & gems
Export volatility	Interest equalization extension

6.2 Digital Infrastructure

• Invoice portals integrated with:
• GSTN
• Banks
• Account aggregation
• Real-time payment tracking

6.3 Regulatory Adjustment

• Delay penalty possibly phased, not abrupt
• Exception list for seasonal industries

 

7. Economic Impact Assessment

7.1 Macroeconomic Transmission

Budget 2025	Budget 2026 (Expected)
Drives demand-led GDP	Drives supply & investment-led GDP
Tax reduction focus	Tax execution & compliance neutrality
GST cuts benefit FMCG	Capex benefits infra, defence, renewables
MSMEs protected softly	MSMEs enforced + supported
High consumption multiplier	High capex multiplier (2.5–3x)

7.2 Jobs, Exports, and Multiplier

• Capex expansion → construction & engineering jobs
• Defence localization → tech & fabrication jobs
• Green manufacturing → future export lanes
• MSME liquidity → avoids bankruptcies, sustains labour

 

8. Risk Factors

• Global slowdown (US/EU demand)
• Oil price and Middle East volatility
• Weather shocks affecting food price inflation
• Fiscal slippage risk if revenue disappoints

 

9. Policy Recommendations

1. National MSME Credit & Invoice Ledger
   Auto-credit lines unlocked when invoices filed
2. Decentralised Energy Push
   Rooftop + agrivoltaics + storage clusters
3. Defence Production Corridors
   Tie-up:
• DRDO
• Private suppliers
• Startups
4. Outcome-Based Budget Tracking
   Evaluate:
• Job creation
• Capex utilisation
• MSME payment compliance

 

10. Conclusion

Budget 2025 sowed the seeds of demand revival.
Budget 2026 must water those seeds through:

• Stronger production capacity
• Infrastructure backbones
• Energy security
• MSME cash-flow discipline
• High-multiplier capital spending

Where 2025 released money in wallets,
2026 must keep factories and workshops running.

Together, the two budgets represent progressive steps from:
Tax relief → Demand revival → Supply expansion → Employment and export strengthening.

REFERENCES

·         Note: Cited government & credible institutional sources, 2024-26 period.

·         Government of India, Ministry of Finance. (2025). Union Budget 2025-26: Budget Speech and Highlights. Government of India Press.

·         Government of India, Ministry of Finance. (2024). Status of the Economy and Fiscal Data. Economic Survey.

·         ASSOCHAM. (2025). MSME Sector Stress Report: Credit, Delayed Payments and Export Pressures. Associated Chambers of Commerce and Industry of India.

·         Confederation of Indian Industry. (2025). Recommendations for Union Budget 2026: Infrastructure and Manufacturing Priorities. CII Policy Papers.

·         Reserve Bank of India. (2025). Monetary Policy Report and Banking Trends. RBI Publications.

·         National Institution for Transforming India (NITI Aayog). (2024). Green Energy and Manufacturing Competitiveness Outlook. NITI Policy Series.

·         PwC India. (2025). Budget Insights: Fiscal Deficit Path and Revenue Expectations. PwC Insights and Tax Bulletin.

·         Federation of Indian Export Organisations (FIEO). (2025). Export Competitiveness Outlook 2025-26: MSME and Global Risks. FIEO Annual Review.

 

Appendix

Tables

• Tax Slabs FY 2025-26 (New Regime)
• MSME Pain Points and Remedies

Discussion Questions

1. Will mandatory payment rules reduce or worsen MSME survival risk?
2. Does shifting capex to railways and defence yield higher long-term returns vs roads?
3. How can India accelerate private sector R&D participation?

Research Hypotheses

H1: Enforcement of MSME payment mechanisms increases survival and productivity in the sector.
H2: Energy storage investment reduces the unit cost of producing electricity over five years.
H3: Capex-led stimulus outperforms consumption-led stimulus for job creation beyond FY27.

 Budget 2025 → Consumption Push

 (Tax cuts, GST reduction)

             │

             ↓

Higher Disposable Income → Rising Demand

             │

             ↓

Short-term GDP boost (FMCG, Retail)

             │

             ↓

BUT: MSME liquidity stress, low private capex

             │

             ↓

───────────────────────────────────────

Budget 2026 → Capability & Supply Push

───────────────────────────────────────

  • Fiscal discipline (4.4% deficit)

  • Defence Capex & Atmanirbhar

  • Railways + Logistics Infra

  • Green Energy & Storage Push

  • MSME payment enforcement + faster GST

             │

             ↓

Outcomes Expected

  ✔ Job Creation

  ✔ Export Competitiveness

  ✔ MSME Survival & Growth

  ✔ Long-term Manufacturing Strength

  ✔ Economy moves from consumption → production