Union Budget 2026 expectations: What Indian economy needs from FM Sitharaman

By Rumki Majumdar After several years, the Union Budget will finally be presented against a backdrop of robust economic fundamentals such as strong GDP growth, controlled inflation, resilient external balances, and a steadily declining fiscal deficit. These outcomes reflect years of consistent policy efforts, but the past year deserves special mention. Amid heightened geopolitical uncertainty, policymakers deployed every lever to sustain demand, through tax exemptions, lower policy rates, and GST rationalisation. Consequently, India clocked an 8% growth rate in the first half of the fiscal year, reaffirming its position as one of the world’s fastest-growing economies.

Given the policy initiatives taken last year, the government probably has fewer resources and limited ammunition to stimulate demand. However, government can now focus on strengthening the supply side of the economy, which is essential to sustain growth and attract private investment that has remained modest for years.

More importantly, supply-side improvements will be critical to rebuild global investor confidence. Gross FDI inflows between April -October 2025 were the highest in five years. Yet, net FDI has been barely US$6 billion, second lowest levels, due to high repatriation and outward FDI, which disrupted currency stability. This Budget can offer an opportunity for the government to reduce supply-side frictions, giving foreign investors the confidence to reinvest earnings, and commit long-term capital.

The supply side focus One of the most obvious key measures in this Budget is likely to be the continued push for capital expenditure, a priority for over six years. It not only boosts demand side by creating jobs and income but also reduces logistics cost and improves competitiveness. In parallel, the government has also hinted on reforms in customs duties to improve trade competitiveness and the ease of doing business.

One of the most significant announcements this budget would be on boosting Micro, Small, and Medium Enterprises (MSMEs), the backbone of India’s economy. Contributing nearly 30% to GDP and employing over 110 million people, MSMEs are central to job creation, income generation, and building a resilient business ecosystem. They also account for almost 46% of India’s exports, making them as the most vulnerable sector to higher tariffs imposed by the US and changing supply chains after the several FTAs being signed in recent months.

Why MSMEs matter now

Formalisation has accelerated through Udyam registration, and credit flows have improved, yet challenges persist. MSMEs face high borrowing costs, delayed payments, and limited access to technology and global markets. Bridging these gaps is vital for inclusive growth.

A few of the budget priorities for MSMEs would be around affordable credit and cash-flow certainty. Amid rising global uncertainties and shifting trade priorities, certain credit guarantee schemes like Credit Guarantee Trust Fund for MSEs (CGTMSE) with higher coverage for first-time borrowers and exporters. Integrating invoice financing with GST data, enforcing timely payment norms to ease working capital stress, lower documentation for repeat and compliant borrowers will improve the accessibility for the last mile enterprises.

MSMEs’ stark productivity gap relative to global peers remains a major barrier to scaling, integrating them into value chains and driving innovation. Technology access could transform this, yet adoption is uneven across sectors and functions. For instance, while nearly 90% of MSMEs accept digital payments, only 18% use digital lending platforms, and automation remains limited.

This Budget should focus on reducing compliance through simplified digital processes, scaling ONDC and GeM for market linkages, and expanding affordable access to cloud solutions and AI-driven analytics. Existing AI and digital skill initiatives can be extended and tailored for MSMEs, with schemes combining skill development, affordable tools, and incentives for digital transformation to boost productivity and global competitiveness.

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