Union Budget 2026 - Driving Structural Reforms Further

The Union Budget 2026 reinforces Government’s commitment of an inclusive and ‘Viksit Bharat’. A more structural and reform-oriented budget with focus around agriculture, health, infrastructure, and technology, defense (allocation at 1.5% of GDP) and banking remain at the center-stage. Push to support MSME, textile industry, Biopharma, fast growing and more promising AI & datacenters, education & youth, point to emphasis at Viksit Bharat. Further, with nominal GDP growth pegged at 10%; net-market borrowing at Rs11.7tn (in-line with market expectations) and fiscal deficit at 4.3% of GDP for FY27e points to fiscal-discipline and more than offsets the near-term impact around increase in STT on derivative products. Focus shifts to earnings, valuations, and external factors (India-US trade, currency and FII outflow). Our top-picks: KSB Ltd, TD Power, Ecos Mobility, Aurionpro Solutions, and Rashi Peripherals Ltd.

Fiscal discipline; glide path towards fiscal consolidation:

The Union Budget 2026, highlights the government’s emphasis on fiscal discipline by focusing on the quality of spending rather than its sheer size. Government's focus on fiscal consolidation remains on track, with the fiscal deficit reducing from 4.8% in FY25 to 4.4% in FY26RE, and a further moderation to 4.3% projected for FY27BE . Importantly, this disciplined approach is also reflected in a declining debt-to-GDP ratio, which has eased to 56.1% in FY26 and remains on a clear path toward the medium-term target of around 50% by FY31. On the revenue side, net tax receipts are projected to grow by 7.2% to Rs28.7tn for FY27BE (see table below). The growth in Centre expenditure is pegged at Rs43.5tn (up 5.8% YoY) for FY27e; defence budget upped to Rs5.94tn (vs. Rs5.67tn for FY26RE / Rs4.91tn as per FY26BE).

AI & Data centers:

The proposed tax holiday for data centers is a structural positive for India’s digital infrastructure ecosystem, accelerating hyperscaler investments and AI-led workloads hosted domestically. Netweb Technologies stands to benefit directly from faster hyperscaler and captive data center capex in India, particularly for AI-first workloads. The co. is well positioned to capture incremental orders in high-performance compute, AI servers and storage as DC capex ramps up. Aurionpro Solutions benefits indirectly through its presence in data center design, consulting, and product manufacturing for DC-related applications; an increase in greenfield and brownfield data center projects should expand the company’s TAM. Rashi Peripherals and Redington stand to benefit from the volume-led expansion in data center hardware procurement, including servers, networking equipment, switches and routers, as new DC capacities are added in India. While we await better clarity, India AI mission the budget has proposed a corpus of Rs10bn towards Artificial Intelligence (AI) through India AI Mission for FY72E (this is half the proposed outlay of the previous year Rs20bn for FY26BE and lowered to Rs8bn as per FY26RE). Enhancement of Safe Harbor Threshold for IT Services from Rs 3bn to Rs 2bn reduces transfer pricing risk by eliminating margin disputes and prolonged litigation.

Global Capability Centers (GCCs) – positive for ECOs Mobility:

The Budget continues to strengthen India’s appeal as a global GCC hub by focusing on skill alignment, easier compliance and better investment facilitation, while also supporting data centre expansion through long-term tax incentives for global cloud players. The push to develop Tier-II and Tier-III cities under the City Economic Regions framework should help broaden the GCC footprint, reduce operating costs and sustain growth in high-value services. ECOS Mobility should get benefited given greater impetus at GCC ecosystem.

Public expenditure intact:

Public expenditure at Rs 12.2tn (+~8.8% YoY), underscores GOI commitment towards infrastructure / public welfare. The budget emphasized continuation/expansion of customs duty exemptions for capital goods in battery, nuclear power, aircraft and defence MRO, and infrastructure boosts like new DFCs, 20 national waterways, container-manufacturing scheme, and ship repair and seaplane schemes. We remain constructive on KSB ltd (play on nuclear power proliferation) and TD Power (data center build outs).

BESS manufacturing:

The Budget has extended the existing Basic Customs Duty (BCD) exemption on imported capital goods for lithium-ion battery manufacturing to include Battery Energy Storage Systems (BESS), with the duty reduced to Nil effective February 2, 2026. This measure, introduced under the energy transition framework, is aimed at lowering equipment costs and supporting domestic manufacturing of grid-scale energy storage. We see limited impact on Godawari Power (GPIL), as Phase-1 of its BESS plan involves importing complete battery packs with limited in-house manufacturing. The provision becomes relevant only in Phase-2, if GPIL decides to backward integrate into cell/pack manufacturing, where it could improve capex economics.

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Frequently Asked Questions (FAQ)

The Union Budget 2026 focuses on fiscal discipline, infrastructure expansion, digital transformation, and sector-specific growth. Below are the most relevant investor questions based on MNCL’s institutional research.

1. What is the key takeaway from Union Budget 2026 for investors?

The budget prioritizes fiscal consolidation, quality spending, and structural reforms, improving macro stability and strengthening long-term earnings visibility across key sectors.

2. How does fiscal policy support market confidence?

The fiscal deficit is projected at 4.3% of GDP for FY27 with controlled borrowing, reinforcing discipline and supporting lower macro risk and stable capital flows.

3. Which sectors benefit the most from Budget 2026?

Infrastructure, defense, capital goods, AI & data centers, digital infrastructure, and sectors linked to public capex and technology adoption are key beneficiaries.

4. How does the budget support the AI and data center ecosystem?

Tax incentives and policy support for data centers, along with AI mission funding, are expected to accelerate hyperscaler investments and domestic digital infrastructure growth.

5. What are MNCL’s top stock beneficiaries from the Budget?

MNCL’s preferred picks include KSB Ltd, TD Power Systems, Ecos Mobility, Aurionpro Solutions, and Rashi Peripherals based on sector tailwinds and earnings visibility.

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