Nirmala Sitharaman Presents One of Her Least Exciting Budgets: Here’s Why

Finance Minister Nirmala Sitharaman presented the Union Budget for the financial year 2026–27 on Sunday. In her Lok Sabha speech, she stated that Prime Minister Modi’s “Reform Express” is on the right track but did not announce any major reforms. She could have reduced the substantial subsidy on urea, but she chose to focus on continuity and stability instead.

A Veteran in Budget-Making:
Sitharaman has presented nine budgets so far, making her the first Finance Minister in India to achieve this milestone. This year’s budget, however, has been termed “least exciting,” as it focused more on maintaining steady growth than announcing bold reforms. The first half of FY2026 has already seen an 8% growth, and in a global scenario of uncertainties, the government has preferred not to disrupt this momentum.

Market Reaction:
Following the budget, the Nifty fell over 2%, primarily due to a sharp increase in Securities Transaction Tax (STT) on futures and options. The government aims to discourage small investors from participating in the futures market, which has seen significant gains in recent years, but where 93% of investors have incurred losses. Experts note that raising taxes alone cannot curb speculation; higher STT only increases trading costs, disproportionately affecting small investors. A more effective measure could have been raising the margin requirements for trades rather than increasing STT.

Fiscal Deficit and Government Spending:
The budget continues the process of fiscal consolidation, though at a slow pace. FY2026’s fiscal deficit is projected at 4.41% of GDP, expected to reduce further to 4.3% next year. The central government’s debt-to-GDP ratio is estimated to decline from 56.1% to 55.6%. While this pace is slower than suggested by the N.K. Singh Committee, the quality of the fiscal deficit is improving.

Capital expenditure (CapEx) has been set at ₹11 lakh crore for FY2026 and increased to ₹12.2 lakh crore for FY2027—a commendable move. Typically, first budgets in a government’s term focus on voter-friendly measures, while last budgets offer populist promises. The third budget is usually suitable for major reforms, but with key state elections in Kerala, Tamil Nadu, West Bengal, Assam, and Puducherry, strict reforms may not have significantly impacted electoral outcomes.

Fertilizer Subsidy and Chidambaram’s Approach:
Excessive urea subsidies have historically led to overconsumption compared to phosphatic and potassic fertilizers, affecting soil quality. Urea diversion to chemical industries or smuggling abroad is also a concern. Previous attempts to reduce urea subsidies failed due to farmer protests. Former Finance Minister P. Chidambaram successfully managed subsidy reductions by gradually increasing diesel prices. Experts suggest Sitharaman could adopt a similar phased approach for fertilizer subsidies.

Growth and Defense Spending:
The budget projects 10% nominal GDP growth next year, with real growth at 7% and inflation at 3%. In a volatile global environment, India’s growth remains robust. Defense expenditure has been increased by 15.3%, acknowledging the need to enhance military capability in response to regional threats, especially from China.

Encouraging AI and Data Investment:
The government aims to position India as a global hub for AI development. Tax exemptions on foreign investment in Indian data centers have been extended until 2047. However, given that major corporations like Microsoft and Amazon have already committed $67.5 billion for infrastructure in India, experts question the necessity of such incentives. India’s advantage lies in its annually produced one crore STEM graduates, highlighting the need for quality improvements in skill development.

Taxation and Corporate Measures:
To reward shareholders, companies increasingly prefer buybacks over dividends. Accordingly, capital gains tax on buybacks has been introduced: 12.54% for long-term and 20% for short-term gains. Measures to curb tax arbitrage include 22% tax on corporate promoters and 30% on non-corporate entities.

Minimum Alternate Tax (MAT) has been reduced from 15% to 14%, and carry-forward provisions removed, making corporate tax more attractive. NRI investors have been exempted from MAT. The government expects ₹80,000 crore from public asset sales in FY2027, up from ₹33,837 crore this year. Investments through Real Estate and Infrastructure Investment Trusts (REITs/InvITs) have been successful, and remaining public sector land can be monetized to fund new projects.