Global uncertainty has remained elevated in the post-Covid years, with the latest salvo on tariffs and trade restrictions in the ongoing fiscal, impacting near-term growth outcomes while also blurring an assessment of the long-term growth trajectory.
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Given this backdrop, the upcoming Budget must double down on policies that strengthen India’s domestic capabilities and boost the country’s growth prospects.
Consumption stimulus underpins FY2026 growth
FY2026 so far has been marked with high GDP growth amidst considerable consumption stimulus coming through tax rationalisation (personal income tax and GST) as well as 125 bps of rate cuts from the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI).
Pay revision would further stimulate consumer spending and is likely to impact the Union Budget in FY2028. In the meantime, the GoI should maximise the fiscal space available to enhance capital spending in FY2027.
Government capex had played an important role in supporting growth in the post-Covid period. A 12-15% enhancement in this head in the coming year would provide an impetus to maintain GDP growth at healthy levels.
This expansion could be split between the Centre’s own capex, and augmenting the allocation under the scheme for special assistance to states for capital investment, known colloquially as the ‘capex loan scheme’.
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Capex loan scheme strengthens state-level investment
Under the capex loan scheme, the GoI provides financial assistance to the state governments in the form of 50-year interest free loans.
This is particularly important because the loan provided under the scheme is over and above the normal borrowing ceiling allowed to the state governments in the financial year.
Consequently, this supplements the overall expenditure of the states, and ringfences it towards capex whereas the existing fiscal space remains fungible between different forms of expenditure.
Besides, the scope of the expenditure under this scheme can be used to cover issues under the purview of the state governments, while the GoI’s capex tends to be focused across roads and highways, railways, and defence.
The GoI has expanded its spending on the capex loan scheme from a low Rs 1.42 lakh crore in FY2022 to Rs 15 lakh crore in the FY2026 budget. A substantial enhancement to Rs 25 lakh crore in FY2027, would take it to 0.6% of GDP.
Further, a timely release of the guidelines of this scheme early in the fiscal would enable the states to better plan and utilise these funds.
Manufacturing push essential to crowd in private capex
Additionally, the GoI must redouble efforts on its manufacturing push, which would help to boost private sector capex. The production-linked incentive schemes have seen mixed progress so far.
Most sectors have not met the intended timelines, with progress varying according to domestic capabilities and the manufacturing ecosystem. The GoI continues to refine allocations and schemes and invite new applications to enhance efficiency and investment. However, sustained effort will be required to fully realise the schemes’ potential.
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Mobile manufacturing success offers lessons
For instance, the success of the mobile device manufacturing segment needs to be replicated across multiple sectors. The production in this segment has increased by 146% between FY2021 and FY2025.
Additionally, mobile phone exports have risen by over eight times during this period, making India a net exporter of this item from a net importer in FY2015. However, here too a significant portion of high-value components (such as chips and displays) are still imported, implying that local value-addition in phones remains low.
There is activity across some sectors. For instance, India now has 10 approved semiconductor projects across six states, which together represent an investment of Rs 1.60 lakh crore.
Likewise, action is also visible across the pharma, telecom and drone space. However, other sectors such as advanced chemistry cells (ACC) batteries and solar (Photovoltaic) PV modules are progressing quite slowly.
ICRA’s channel checks indicate that some entities have experienced operational delays (such as regulatory, infrastructure, supply chain) and, in certain cases, there have also been delays in receiving incentives.
The GoI must iron out issues across sectors while also raising the allocation for incentives in the FY2027 Budget materially as production picks up pace across some sectors.
National Manufacturing Mission as a new growth lever
To accelerate manufacturing growth, along with the production-linked incentive schemes, the GoI has also introduced the National Manufacturing Mission (NMM).
Aligned with existing policy frameworks and designed to support MSMEs and start-ups – 500 of which were onboarded by August 2025 – the Mission establishes a strong foundation for industrial transformation.
Going ahead, its success will depend on effective execution. If implemented well, it can significantly reduce import dependency, generate employment and establish India as a global exporter by leveraging domestic strengths.
The outlay under the NMM can be scaled up in the upcoming budget to provide stronger support for MSMEs and start-ups, enabling them to accelerate their manufacturing journey.
Balancing fiscal consolidation with growth priorities
While the target has shifted to the debt to GDP ratio, displaying some decline in the fiscal deficit to GDP ratio would remain important.
Within this context, maximising the space available to enhance Government capital expenditure is crucial to reinforce infrastructure, attract private investments and boost sentiment.
Get the latest on Budget 2026 and related developments here.
This article is authored by Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA.