Union Budget 2026: Fiscal Discipline with Infra Push, MSME ‘Champions’, Data Centre Tax Holiday and Higher STT

Presenting the Union Budget 2026-27 in Parliament, Finance Minister Nirmala Sitharaman combined fiscal consolidation with an aggressive push for capital expenditure, infrastructure, MSME growth, digital economy and labour-intensive sectors. The Budget pegged the fiscal deficit at 4.3% of GDP, raised capex to a record Rs 12.2 lakh crore, announced a long tax holiday for global data centre operators, rationalised subsidies, proposed higher STT on derivatives, and rolled out targeted measures for textiles, exports, cooperatives and poll-bound West Bengal, drawing sharp political reactions and a volatile market response.

Fiscal Consolidation and Debt Path
Continuing the glide path of fiscal discipline, Sitharaman pegged the fiscal deficit for 2026-27 at 4.3% of GDP, marginally lower than the 4.4% estimated for 2025-26. Emphasising credibility in public finances, she reiterated the government’s commitment to bring the Centre’s debt-to-GDP ratio down to 50% by 2030-31.

In line with this roadmap, the debt-to-GDP ratio is estimated to decline to 55.6% in Budget Estimates (BE) 2026-27 from 56.1% in Revised Estimates (RE) 2025-26. Sitharaman said a declining debt ratio would gradually free up resources for priority sector spending by reducing the burden of interest payments, without compromising on social sector needs.

Infrastructure: Record Capex and Risk Guarantees
Infrastructure emerged as a central pillar of the Budget, with capital expenditure for FY27 raised to Rs 12.2 lakh crore from Rs 11.2 lakh crore in the current fiscal. The capex outlay, at 4.4% of GDP, is the highest ever.

The Finance Minister said the government would continue to focus on infrastructure development in Tier-2 and Tier-3 cities, while proposing the setting up of a risk guarantee fund for the infrastructure sector to crowd in private investment. She also announced a new scheme for enhancement of construction and infrastructure equipment to strengthen domestic manufacturing and reduce import dependence.

Data Centres: Tax Holiday till 2047
In a major boost to India’s digital and AI ambitions, the Budget proposed a tax holiday till 2047 for foreign companies providing cloud services to global customers using data centres located in India. The move signals the government’s intent to position India as a global hub for artificial intelligence and digital infrastructure.

By linking tax incentives to servicing global customers from India, the policy aims to turn the country into an export hub for cloud computing, shifting India’s role from being a consumer of global digital services to becoming a backbone of the global digital economy.

Highways: Higher Allocation for Roads and NHAI
The road transport and highways sector received an allocation of Rs 3.09 lakh crore for 2026-27, around 8% higher than Rs 2.87 lakh crore in the current year. The allocation to the National Highways Authority of India (NHAI) was increased to Rs 1.87 lakh crore from Rs 1.70 lakh crore, underscoring the government’s continued focus on highway expansion and logistics efficiency.

MSMEs: Creating ‘Champion’ Enterprises
Recognising MSMEs as a vital engine of growth and employment, Sitharaman unveiled a three-pronged strategy—Equity Support, Liquidity Support and Professional Support—to create ‘Champion MSMEs’.

A dedicated Rs 10,000 crore SME Growth Fund was proposed to incentivise and scale future champions based on select performance criteria. The government will also top up the Self-Reliant India Fund with Rs 2,000 crore to support micro enterprises and ensure continued access to risk capital.

To address liquidity constraints, the Finance Minister said the government would leverage the full potential of the Trade Receivables Discounting System (TReDS), which has already enabled more than Rs 7 lakh crore in financing to MSMEs.

Subsidies: Marginal Rationalisation
The Budget pegged total subsidies on food, fertiliser and fuel at Rs 4,10,495 crore for 2026-27, about 4.47% lower than the revised estimate of Rs 4,29,735 crore for the current year.

Food subsidy is estimated at Rs 2,27,629 crore, largely driven by the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), which provides free ration to over 81 crore beneficiaries. Fertiliser subsidy is projected to decline to Rs 1,70,805 crore, with urea accounting for Rs 1,16,805 crore and non-urea fertilisers Rs 54,000 crore. Petroleum subsidy is estimated at Rs 12,085 crore, lower than the current year.

Textile Sector: Integrated Programme and Mega Parks
To revive the labour-intensive textile sector, the Budget announced an integrated programme with five sub-parts. A key component is the National Fibre Scheme aimed at self-reliance in natural fibres such as silk, wool and jute, man-made fibres, and new-age fibres.

The proposed Textile Expansion and Employment Scheme will modernise traditional clusters through capital support for machinery, technology upgradation, and common testing and certification centres. The government also reiterated plans to set up mega textile parks to enhance scale and global competitiveness.

Cooperatives: Expanded Tax Benefits
The cooperative sector received targeted tax relief, with deductions extended to primary cooperative societies supplying cattle feed and cotton seed produced by their members. Currently, such deductions apply to cooperatives dealing in milk, oilseeds, fruits and vegetables.

The Budget also proposed allowing inter-cooperative society dividend income as a deduction under the new tax regime to the extent it is further distributed to members, aligning it with provisions already available under the old regime.

Exports: Relief for Labour-Intensive Sectors
In a bid to support exports facing global headwinds, the Budget proposed raising the duty-free import limit for specified inputs used in processed seafood exports from 1% to 3% of the previous year’s FOB value. Duty-free imports for leather or synthetic footwear exports were extended to include shoe uppers.

The time period for exporting final products was also extended from six months to one year for leather, textile garments, footwear and other leather products. These measures come amid challenges posed by higher US import duties, even as seafood exports rose 15.53% to USD 6.5 billion during April-December 2025.

STT Hike: Market Volatility and Debate
The Budget proposed a sharp increase in Securities Transaction Tax (STT) on derivatives to curb excessive speculation. STT on futures was raised to 0.05% from 0.02%, while STT on options premium and exercise was increased to 0.15%.

The government also announced that buyback proceeds for all shareholders would be taxed as capital gains. The move triggered a sharp market reaction, with Sensex and Nifty plunging nearly 3% intraday before recovering partially.

Market experts said the hike could moderate derivative volumes and speculative activity, though concerns were raised about near-term impact on foreign portfolio investor participation.

West Bengal Focus: Infra, Rail and Tourism
With Assembly elections due, West Bengal featured prominently in the Budget. Sitharaman announced a new dedicated freight corridor from Dankuni to Surat, an industrial node at Durgapur under the East Coast Industrial Corridor, five tourism destinations across Purvodaya states, 4,000 electric buses, and a proposed high-speed rail corridor linking Varanasi and Siliguri.