The Union Budget 2026, due next month, faces mounting pressures from escalating defence and infrastructure demands. BMI, a Fitch Solutions firm, predicts a rise in defence and capital expenditure allocations. This comes as the government juggles fiscal consolidation with domestic ambitions and external threats.

India's fiscal deficit target for FY2026-27 stands at 4.3 per cent of GDP. BMI forecasts the actual figure could slip to 4.6 per cent. Such a deviation highlights the tension between prudent budgeting and urgent security needs.

The external environment has grown perilously volatile. India has clashed militarily with both China and Pakistan over the past five years. These confrontations demand heightened vigilance and resources.

Defence spending as a share of central government outlay has stagnated recently. It plunged sharply between 2018 and 2020 before stabilising. China's robust defence investments and Pakistan's fresh budget hike compel New Delhi to respond decisively.

Authorities must prioritise security enhancements in FY2026-27. Elevated border tensions necessitate modern weaponry, troop readiness, and surveillance upgrades. Failure to act risks strategic vulnerabilities.

Fiscal consolidation remains a cornerstone policy. Finance Minister Nirmala Sitharaman has emphasised slashing the debt-to-GDP ratio as a core priority. This focus aims to restore macroeconomic stability post-pandemic.

COVID-19 triggered a massive spike in public debt. India's debt-to-GDP ratio soared to unprecedented levels during the crisis. Aggressive deficit trimming has since brought it down to 4.75 per cent of GDP in FY2024-25.

Yet public debt lingers far above the 50 per cent target set for 2031. Official projections assume 10.5 per cent nominal GDP growth annually through that year. Hitting the debt goal requires starting with a 4.3 per cent deficit in FY2026-27.

This path minimises disruptions to economic growth. However, aspirational goals like Viksit Bharat—India's vision for developed nation status by 2041—clash with austerity. Massive public investments in infrastructure and SMEs are essential.

Past consolidation efforts inadvertently squeezed capital expenditure relative to GDP. This slide threatens long-term development. Reversing it demands bold budgetary reallocations.

Prime Minister Narendra Modi recently unveiled a six-year Rs 1 trillion Research and Development fund. This initiative targets innovation across sectors, including defence and space. It underscores commitment to technological self-reliance.

Investors anticipate ₹3,00,000 Crores for the railway sector in Budget 2026. Citing Hindustan Times, BMI notes this as part of broader infrastructure revival. Such allocations aim to boost connectivity and economic multipliers.

These measures will inevitably inflate the deficit. Counterbalancing requires robust revenue growth. Yet BMI warns of headwinds from recent tax reforms. Goods and Services Tax tweaks in 2025, alongside Income Tax changes, may dent collections. Finance Minister Sitharaman has flagged customs duties rationalisation as a budget priority. Prior reforms suggest this could further erode receipts.

If rationalisation mirrors past efforts, tax revenues face additional strain. BMI thus projects a 4.6 per cent actual deficit. This gap reflects the fiscal tightrope New Delhi must navigate. Defence modernisation emerges as a non-negotiable imperative. Indigenous projects like Tejas fighters and AMCA stealth jets demand sustained funding. Border infrastructure along the LAC and LoC requires accelerated capex.

Hypersonic missiles and drone swarms represent cutting-edge needs. Partnerships with Russia, the US, and Israel bolster capabilities. Yet budget constraints could delay critical acquisitions.

Infrastructure spending fuels Viksit Bharat's engine. Roads, ports, and airports drive GDP growth. Railways' ₹3,00,000 Crores ask aligns with electrification and high-speed corridor ambitions.

The R&D fund promises breakthroughs in aerospace and materials science. It supports DRDO, HAL, and private players like Tata Advanced Systems. Spillover benefits to defence manufacturing are substantial.

Fiscal targets hinge on revenue buoyancy. GST and income tax reforms aim for efficiency but risk short-term dips. Customs easing could spur trade yet shrink duties. Debt sustainability demands discipline. A 4.3 per cent deficit benchmark sets the glide path to 50 per cent debt-to-GDP by 2031. Slippages to 4.6 per cent, while manageable, erode credibility.

Geopolitical realities override fiscal purity. China's defence outlays dwarf India's, fuelling an arms race. Pakistan's budget rise, amid economic woes, signals desperation.

New Delhi's response must blend deterrence with diplomacy. Elevated capex on tri-services modernisation is vital. Cyber and space domains add new frontiers. Domestic aspirations amplify pressures. SME support via credit guarantees and skilling programmes requires funds. Infrastructure multipliers justify the spend.

BMI's outlook tempers optimism with realism. Growth projections underpin feasibility. Yet exogenous shocks—geopolitical flares or revenue shortfalls—loom large.

Budget 2026 will test policy resolve. Balancing security, development, and prudence defines success. Stakeholders watch keenly as Sitharaman crafts her roadmap.

Based On Agency Inputs