Budget 2026: What to Expect, Key Sectors and Stocks to Watch

As 2026 unfolds, India’s Federal (Union/Central government) annual budget and broader economic, fiscal policy for FY: 26-27 will be presented by the Union Finance Minister (FM) Nirmala Sitharaman on Sunday, February 1, 2026. The market is now expecting an emphasis on fiscal prudence rather than expansive fiscal stimulus after recent GST recalibrations and an income tax cut last year.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Over the past few years, India’s Federal Government has already front-loaded policy support through corporate, income and GST tax cuts, especially under the new tax regime. These steps, along with relatively lower headline inflation in FY26, are expected to result in improved disposable real income and discretionary consumer spending in FY27. Thus, there is no need and also no space for further broad-based tax cut stimulus.

But as the FM already indicated, the budget may contain an extensive recalibration of India’s high & complex tariffs (customs duties) regime, aiming at a potential trade deal with the US. Tariff rationalisation may be selective, sector-specific and aligned with broader trade objectives. The focus may also be non-tariff barrier (NTB) rationalisation, including simplification of standards, certifications and customs procedures—an area with high economic impact and low fiscal cost.

Expected Budget 2026 Overview

Overall, the FY27 budget may stress more on policy recalibration, fiscal discipline, price stability, inclusive quality employment generation, stable macros & currency and efficiency (productivity)-led sustainable double-digit nominal GDP (economic) growth as India aspires to be a developed & 3rd largest economy by 2047. As recent GST and income tax cuts, along with expected tariffs, i.e. indirect & direct tax cuts, may keep FY27 fiscal revenue under stress, the government may not provide further tax cut stimulus in a big way.

Although some market participants are demanding the abolition of Long Term Capital Gains Tax (LTCGT), the government may not provide it (as base case scenario)-not only for any revenue implications (although smaller)-but also for policy implementations (after the DEMO in late 2017). Having said that move for simplification- even if revenue-neutral- may be seen as a huge positive for the market sentiment.

But to revive the subdued stock market sentiment amid ongoing exits of FPIs and muted returns in 2025, the government may also tinker with STT or any double taxation issue, as revenue implications are minimal for these, and GST is itself tracking all the transactions. The actual motive of the government is to prevent the capital market as an instrument of money laundering. The government may also recalibrate ESOPs' taxation policies to revive startups' CAPEX cycle.

The government may also stress higher dividends from PSU banks, in line with RBI dividends, with renewed emphasis on PSU/PSE disinvestments to take care of the revenue side, as public debt & liabilities are now soaring. The Federal government is now paying almost 45% of core tax revenue as interest on public debt, while absorbing almost 35% on Federal employees' payroll (salaries & pensions)-leaving little for actual development, i.e. traditional & social infra.

Thus, the government may now focus more on non-tax revenue to balance the fiscal side-via elevated PSU dividends (leveraging RBI's January 2026 draft raising commercial banks' payout cap to 75% of PAT from prior ~40%), and calibrated disinvestment. No major fiscal stimulus is expected, preserving fiscal consolidation (deficit target ~4.4% for FY26, potentially 4.0–4.1% for FY27).

In brief, the thrust may be on policy continuity with surgical & innovation-led interventions rather than broad fiscal stimulus. The FY27 Budget is expected to focus on calibrated tariff reforms, targeted sectoral support, sustained public capex, incremental structural & policy reforms (deregulations) for ease of doing business in India. This strategy is broadly supportive for macro stability, currency confidence and sovereign risk perception to avoid any rating downgrade.

Budget 2026 - Likely Sectoral Impact and Stocks to Watch Within the Sectors

• Infrastructure, Capital Goods and Cement: Big beneficiaries of sustained infra capex may be L&T, Siemens India, ABB India, Cummins India, UltraTech Cement, Ambuja and Shree Cement.
• Banks and Financials: Higher dividend payouts, stable asset quality and potential further PSBS mergers/consolidations may favour SBI, BOB, PNB and select PSU lenders like IRDEA (RE financing); also, other Infrastructure financing institutions stand to benefit from ongoing infra CAPEX continuity-almost ₹15-20 trillion on average for the next 10 years; also watch HDFC, ICICI, AXIS, KOTAK and Indusind Banks in the private space.
• Manufacturing and Exporters: Companies aligned with PLI, export growth and trade integration—such as Tata Motors, Bharat Forge, Dixon Technologies, and select auto ancillaries—remain well placed.
• Technology, EV and Renewables (REs): Large IT services firms like TCS, INFY, Wipro, HCL Tech, etc, may benefit from AI-led productivity themes, while EV and renewable plays such as Adani Greens, Tata Power, NTPC, Power Grid, NHPC, Suzlon, and select battery ecosystem players gain from policy continuity.
• Logistics and Aviation: Improved transport infrastructure supports logistics players and airport operators, with positive spillovers for tourism and services like IRCTC, INDIGO, ITC Hotels, etc.
• Energy (Oil & Gas, LNG, Transition Plays): Gas infrastructure and traditional energy offer stability; customs tweaks enhance competitiveness amid energy security priorities; watch RIL, ONGC, GAIL, Petronet LNG and also OMCs (BPCL and IOCL).
• The MSME Proxy: Action Construction Equipment (ACE).

Overview of Top Stocks to Watch in Budget 2026

1) The Dividend Play: SBI

With the new RBI payout rules, SBI is the primary candidate for a massive dividend hike. As India’s credit engine, its robust balance sheet and 12-14% loan growth guidance-one of the big beneficiaries despite the potential concern about fresh CAPEX after higher dividend pay-outs.

2) The King of Infrastructure: L&T

It remains the ultimate proxy for India’s capex cycle. Its dominance in EPC projects, coupled with its pivot into Green Hydrogen and Defence Electronics, ensures it captures the lion's share of the 2026 infrastructure outlay.

3) The Tech Innovator: Tata Elxsi

As the government pushes the IndiaAI Mission, Tata Elxsi’s expertise in AI-led design and software-defined vehicles positions it as a high-growth tech play. It is a direct beneficiary of the R&D incentives expected in the budget.

4) The Green Energy Leader: Tata Power

Tata Power is transforming from a traditional utility to a green energy powerhouse. With massive investments in EV charging and solar manufacturing, it is perfectly aligned with the budget's VGF and RE incentives.

5) The Defence Stalwart: Bharat Electronics (BEL)

BEL is a "Make in India" champion. With a ₹50,000 crore order pipeline and the government’s focus on "Drone Shakti" and indigenous radar systems, BEL offers stable growth with high sovereign security.

Conclusion: The Theme of Prudence Over Populism

The FY27 Budget may be remembered as the moment India chose Prudence over Populism. By refusing to engage in broad fiscal stimulus and instead focusing on Efficiency, Productivity, and Innovation, the government is laying the groundwork for sustainable long-term returns. The abolition of LTCGT remains a market fantasy; the reality is a regime of Tax Stability and Non-Tax Revenue Windfalls. Investors should ignore the noise of "Sunday Volatility" and focus on the structural winners: the banks funding the growth, firms building the infrastructure, and the innovators defining the digital future.