Delivers on Fiscal Discipline & Infrastructure Push. But, STT and buyback taxes roil indices

1 Feb 2026 , 03:42 PM

As India presented the Union Budget 2026, market participants approached the policy event with a measured mix of caution and focus, shaped by a decade of uneven equity market reactions to budget announcements. Over the last 10 budgets, market outcomes had alternated between gains and declines, underscoring how investor sentiment tended to hinge less on headline measures and more on the credibility of fiscal math, the quality of capital expenditure, and signals on structural reform. Against a backdrop of moderating growth, global uncertainty, and heightened sensitivity to fiscal discipline, expectations going into the budget were centred on sustaining public capex, adhering to the medium-term fiscal consolidation path, and providing targeted support to key sectors rather than broad-based stimulus.

The Big Picture – Fiscal Discipline and Continued Infrastructure Investment

The Union Budget 2026 delivered on the big picture. It reaffirmed the government’s commitment to fiscal consolidation while sustaining an investment-led growth strategy. The fiscal deficit was set at 4.3% of GDP for FY27 (from 4.4% in FY26), reinforcing the medium-term consolidation roadmap even as public investment remained a priority. Capital expenditure was raised to ₹12.2 lakh crore, up from ₹11.2 lakh crore in FY26, keeping capex above 3% of GDP as the primary growth lever. Revenue assumptions remained robust, with gross tax revenues budgeted at ₹44.0 lakh crore, supported by compliance-driven GST collections of approximately ₹11.8 lakh crore. Macro assumptions reflected confidence in nominal GDP growth of ~10.5–11%, and a gradual reduction in the debt-to-GDP ratio to ~55.6%, signalling policy continuity, fiscal credibility, and an emphasis on long-term productivity.

In summary:

• Fiscal deficit: Targeted at 4.3% of GDP (FY27) vs 4.4% (FY26)
• Capital expenditure: Increased to ₹12.2 lakh crore from ₹11.2 lakh crore
• Tax revenues: Gross tax revenue ₹44.0 lakh crore; GST collections ~₹11.8 lakh crore
• Macro assumptions: Nominal GDP growth ~10.5–11%, debt-to-GDP easing to ~55.6%

 

Infrastructure & Strategic Capex: Focusing On Next-Gen Engines

In Budget 2026–27, infrastructure spending continued to anchor India’s growth strategy, but with a clear evolution from traditional allocations toward strategic, future-ready sectors. Capital expenditure was raised to ₹12.2 lakh crore, up from ₹11.2 lakh crore in FY26, keeping public investment above 3% of GDP. While the headline increase was modest, the emphasis shifted decisively toward execution quality, asset monetisation, and crowding in private capital, signalling a more mature, efficiency-driven phase of India’s infrastructure push.

Beyond roads, railways, and ports, Budget 2026 explicitly targeted next-generation manufacturing engines. Initiatives for semiconductors, electronics, and pharmaceuticals were embedded within the capex framework, reflecting the government’s intent to diversify India’s industrial base and strengthen high-value manufacturing ecosystems. Coupled with traditional investments in Dedicated Freight Corridors, inland waterways, and logistics hubs, this approach signals a strategic pivot: infrastructure is no longer just connectivity, but a foundation for technology-intensive, globally competitive sectors.

Compared with FY26, the focus has shifted from a largely allocation-driven expansion to a quality-focused, sector-diversified framework. Instruments such as the Infrastructure Risk Guarantee Fund and enhanced CPSE asset monetisation via REITs aim to de-risk investments and attract private participation, ensuring that every rupee of public capex generates maximum economic leverage.

Highlights:

• Capex: ₹12.2 lakh crore (FY27) vs ₹11.2 lakh crore (FY26) — ~9% YoY increase
• Strategic focus: Beyond roads and railways to include semiconductors, electronics, pharma, and high-tech manufacturing
• Execution & efficiency: Emphasis on risk mitigation, asset monetisation, and private sector participation
• Growth engine: Infrastructure as a foundation not only for connectivity but for next-generation industrial capacity and long-term productivity

 

Why the Market Didn’t Like It — F&O STT & Buyback Tax

Although the Union Budget 2026–27 delivered on long‑term priorities like fiscal discipline and capex, equity markets reacted negatively in the special Budget Day session largely due to capital markets‑specific tax changes that directly affect trading costs and corporate payout mechanisms:

Higher STT on F&O Contracts

The government raised the Securities Transaction Tax (STT) on derivatives — with STT on futures raised to 0.05% (from 0.02%) and on options premium to 0.15% (from 0.10%). This sharp increase in transaction costs affects traders, hedgers, arbitrageurs and high‑frequency participants because STT is levied on the value of each trade (not on profits). Brokerage and exchange stocks (e.g., BSE, Angel One) sold off sharply as they are highly sensitive to derivatives turnover.

Buyback Tax Treated as Capital Gains

The Budget also revised the tax treatment of share buybacks, announcing that proceeds will be taxed as capital gains for all categories of shareholders, with effective rates increasing significantly for promoters. Although the framing attempts to protect minority investors and reduce arbitrage, markets viewed this as reducing the attractiveness of buybacks as a capital return strategy — particularly for large‑cap corporates that use buybacks to support EPS and valuations. That reduction in corporate flexibility weighed on sentiment, especially among long‑term and dividend‑oriented investors.

Structural and Sentiment Factors

Beyond the specific tax tweaks, markets were disappointed by the absence of new incentives to drive foreign flows, valuation catalysts, or structural reforms targeted at boosting liquidity. The derivatives market — one of the world’s largest by volume — reacted sharply because even modest STT increases can materially erode after‑tax returns for frequent traders and dampen participation.

In Essence

• Higher STT on futures and options directly raised trading costs, reducing derivatives activity and brokerage/exchange revenues.
• Reclassification of buyback proceeds as capital gains was perceived as reducing a shareholder‑friendly capital return tool.
• These measures, coming early in the Budget speech, dominated market psychology, causing risk assets like the Nifty to trend lower despite broader macro fundamentals remaining intact.