Budget 2026-27: Traders Simmer while Data Centres Glitter

Against the backdrop of global geopolitical fragmentation, courtesy “Trumpian Tantrums, Finance Minister Nirmala Sitharaman rose to present her record 9^th Budget. The stock market, not always the best barometer, reacted negatively to some parts of her budget speech, which were seen as investor friendly but trader unfriendly, on a Sunday, when FIIs were largely absent from the market. Interest on leveraged trades, which could earlier be set of up to 20% of dividend income, as per Dinesh Kanabar has now been withdrawn. Therefore, how furiously the stock & currency markets would react starting tomorrow is anyone’s guess unless the calming hand of the RBI intervenes or there is a US trade deal.

Following were the expectations from the budget, although only some of them were partially met

·         Continue with the path of fiscal consolidation & keep powder dry to be deployed when necessary. The Government did not disappoint; announced Fiscal Deficit of 4.4% of GDP for FY 26 & projected a figure of 4.3% for next year.

·         Attract foreign inflows to arrest the fall in the rupee. India’s Net FDI at 0.1% of GDP for FY 25 is at a multi decadal low. Suggestion, by some analysts, to extend the benefit of zero taxation, for investments into infrastructure, currently available for sovereign wealth & pension funds, to endowments went unheeded. Also passed by was a suggestion to reduce Long Term Capital Gains tax for stocks to zero for tenure over 3 years (say), rightly so as Government of India (GOI), appears keen to have similar treatment across asset classes.  STT (Security Transaction Tax) on F&O for stocks was upped, instead, to curb speculation – rightly, to protect retail investors against algorithmic High Frequency Traders – which, however, spooked the markets. 55% of BSE & 70% of NSE revenues, as per CNBC – is derived from F&O & hence the stock prices of BSE dropped. While SEBI’s recent paper showed that 9 out of 10 people lose money in F&O, questions remain though on why STT was increased for stocks alone & not commodities.

·         Rationalization of custom duty slabs from current 8 as was done for GST & an amnesty scheme to unlock 1.5 lakh cr. struck in customs litigations: Custom duties for specific items in strategic sectors like Aviation, Battery & EV & Nuclear power were reduced possibly as GOI, negotiating Free Trade Agreement deals with preferred economic unions like EU, may want to retain the negotiating leverage rather than uniformly drop rates for all countries. 

Niti Ayog Chief BVR Subramanyam averred that while focus was on job creation in budget FY 24 & manufacturing in FY 25, the focus of the current budget is “services” – Healthcare, Tourism, Education Sports & Orange economy. Target is to achieve 10% of global services by 2047.

The broad thrust of the fiscally credible budget

·         Nominal revenue growth of 10% for FY 26-27 against 8% this year seen as conservative.

·         Higher than expected gross borrowing of INR 17.2 Lakh crores & the fear of “crowding out” effect thereof leading to raise in bond yields & consequent marked to market losses impacted banking stocks negatively.

·         It is widely felt that capex as a % of GDP could largely stabilize at around 3%. But announcement of 7 High Speed Rail corridors as “growth connectors” & the Defence Secretary’s statement of expecting 20% growth in Defence budgets over the next 5 years to increase Defence spends to 2.5% of GDP against around 2% now, indicates that we could be up for surprises.

·         India plans to ride the global investment theme of “AI”over the last one year, especially in countries like US, Korea, Taiwan etc. by drawing investments into Data centres by offering a tax holiday, till 2047, to foreign companies providing cloud services outside India using Indian Data centres. Sale to Indian users shall be vide resellers & they will be taxed appropriately. While investments into data centres will flow, as Indian states are offering land & power cheap, will foreign nations not be keen on “data sovereignty” just like India? Will they be comfortable to allow their data to rest in Indian data centres.

·         As per MeiTY Minister Ashwini Vaishnav there are 15L employees in GCC, 25L in EMS & 55L in ITES. Safe Harbour margin of 15.5% for a threshold of 2000cr. for IT services, increase in allocation from 22.9K cr. to 40k cr, for Electronic Component Manufacturing services & Indian Semiconductor Mission (2.0) are meant not only to fortify supply chains but also provide greater employment opportunities.

Conclusion

GOI reduced personal income tax rates & GST rates last year & implementation of the 8^th Pay commission recommendations appears the next arrow in their quiver to pump prime the economy to drive consumption. No big bang announcements were, therefore, expected in the budget. Trade deals signed with UK, EU etc will take time to give results as they are yet to be approved by their respective parliaments. In such a volatile & uncertain environment, a fiscally prudent budget was the only option.