However, this may not come to fruition if the Union government opts for a measured approach as it could be hampered by the fiscal deficit, which is still targeted at 4.4 per cent for FY26 as per the previous budget estimate – as against the 3.5 per cent range in the pre-Covid years. Moreover, the administration could choose not to squeeze revenues given current global uncertainties, heightened by US President Donald Trump’s recent support of a bill that threatened 500 percent tariffs on countries buying Russian crude.
Inflation has also fallen steadily in the months leading up to the budget, reaching an all-time low of 0.25 percent in October before rising slightly to 0.71 percent in November.
Estimates put December inflation at around 1.6 percent, which remains well within the RBI’s target of 4 percent (with a margin of ±2%). This low inflation environment, as per RBI guidelines, provides scope for monetary easing as inflation is significantly below target.
The first meeting of this year’s Monetary Policy Committee (MPC) will take place from February 4 to 6, 2026, after the budget, and its outcomes will be announced on February 6.
The economy has proven resilient despite global challenges. According to previous estimates, GDP growth will be 7.4 percent. with the growth rate in the second quarter being 8.2 percent. FY27 forecasts range from 6.7 percent to 7.5 percent, taking into account uncertainty over potential additional U.S. tariffs.
For India to achieve its Viksit Bharat 2047 target, the country’s GDP will need to grow by about 8 percent annually in real terms, or 11.4 percent in nominal terms. So there is hope among middle-class taxpayers that further cuts are in store to boost consumption even further.
Tax reduction expectations
There is speculation – based on the significant tax reduction and VAT rationalization in the previous year – that the government could continue this trend of further tax reduction.
If the budget were to prioritize tax exemption to further boost consumption, it would seek to adjust income tax slabs in the new tax regime. TDS rationalization could reduce rates for easier compliance. The government is unlikely to look at GST rate revisions again after the major revision in September. But if so, consumption could get a further boost, probably at the expense of fiscal discipline.
Refinements of tax regimes
With an adoption of more than 75 percent, the new tax regime could be further promoted. The government has tried to make it more attractive than the old regime, suggesting a possible intention to phase out the old tax regime and its complexity – either by further encouraging voluntary adoption or by ending the old regime completely.
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Published on January 9, 2026
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