Budget 2026 is pragmatic, but India needs administrative reform too

When Finance Minister Nirmala Sitharaman rose in Parliament to present the Union Budget on February 1, India faced a choice it had confronted before: govern through schemes or enable through simplicity. The market’s sharp slide dominated headlines. But the real question facing policymakers, businesses and investors is whether India can compete for the next decade’s capital without fundamental administrative reform.

Markets react. Budgets shape. But only reforms that reduce friction determine whether a country captures or loses the mobility premium of global capital. Strip away the noise and what emerges is a fundamentally pragmatic document: cautious on fiscal math, serious about long-term capacity building. In an uncertain global environment marked by slowing trade and hardball geopolitics, pragmatism is not timidity. It is maturity. That is what the FM has achieved.

Yet this Budget, for all its strategic intent, stops short of one reform India desperately needs: less government, less complication, more trust in businesses. That, not stock market volatility, is the real missing piece.

Markets don’t reflect macroeconomics

The post-Budget sell-off was driven partly by higher securities transaction tax on derivatives and the absence of short-term sweeteners for traders. But a tax change affecting leveraged trading cannot be the lens for judging a ₹50 lakh-crore national budget. Markets are tactical. Budgets are structural. Confusing the two is an error.

Foreign portfolio flows have been volatile for much of the past year. The Economic Survey shows net FPI outflows of over $3 billion during FY26, as global funds rotated toward the U.S. and East Asia amid AI-led rallies. That shift reflects global asset allocation, not India’s fundamentals.

The government has set a fiscal deficit target of 4.3% of GDP for FY27, continuing the consolidation path. Total expenditure is pegged at ₹53.5 lakh crore, with capital expenditure of ₹12.2 lakh crore.

This is exactly what India needs: spend on assets, not giveaways. Public capex (roads, rail, logistics, digital backbone) crowds in private investment and lowers economy-wide costs. India’s logistics costs, while improved from 13-14% of GDP to around 8%, remain higher than those of developed economies. Reducing that gap is among the most reliable ways to lift competitiveness.

The structural bets

Lost in the market chatter were the Budget’s longer-term strategic commitments. These are competitive imperatives in a world where Vietnam secures $40 billion in annual FDI, Indonesia becomes ASEAN’s manufacturing anchor, and Malaysia fast-tracks visas to capture unicorn headquarters.

Seven proposed high-speed rail corridors (Mumbai-Pune, Pune-Hyderabad, Hyderabad-Bengaluru, Hyderabad-Chennai, Chennai-Bengaluru, Delhi-Varanasi, Varanasi-Siliguri) are not transport vanity projects. When travel time between Bengaluru and Chennai drops from five hours to 90 minutes, you are redrawing economic geography.

India continues pushing incentives for semiconductors and advanced electronics. With the domestic semiconductor market projected to reach $64 billion by 2030, building domestic capability is not optional. Tax clarity for hyperscale data centres aims to position India as a global compute hub. Support for global capability centres and IT services deepens India’s strongest export engine. Programmes for biologics and therapeutics leverage pharma strengths.

Taken together, these are decadal bets that determine whether a country is a destination or a detour.

The broader macro backdrop deserves acknowledgement. Bank balance sheets are healthier than they were during the twin balance-sheet crisis. NPAs have declined to multi-decade lows, PSU banks are profitable and credit flow has been restored. This gives the government credibility to attempt deeper reforms.

Where the Budget falls short

The real gap is not STT or derivatives. The real gap is structural. Despite the promise of “minimum government”, the Budget once again reveals an instinct for maximum administration.

Across sectors, the state’s reflex remains: create a scheme, create a vehicle, create an authority, supervise.

Instead of: set the rules, enable markets, step back.

Consider a foreign investor setting up a mid-sized electronics unit. Despite the single-window system, she navigates more than a dozen different approvals across environment, labour, fire safety and sector clearances, each with its own timeline and discretionary checks. It gets worse at the state level, where rubber hits the road.

While large corporations deploy compliance teams, mid-sized firms burn capital on consultants and wait times. The Economic Survey itself acknowledged this: India’s FDI lags Vietnam, Malaysia and Thailand not because of incentives, but because of “speed, predictability and high-level political backing.”

Every additional layer raises transaction costs and slows decisions. Domestic firms learn to navigate this maze, but managing government becomes their preoccupation, and global competitiveness takes a back seat. Global investors simply choose easier jurisdictions. That is the opportunity cost. And it compounds.

The capital confidence problem

Foreign capital trends matter more than daily market moves. Domestic institutional investors have cushioned markets during foreign selling. But the narrative that “DIIs can replace foreign investors” is flawed economics.

Domestic money reallocates domestic savings. Foreign capital expands the pie. FDI brings technology, governance standards and global supply chain integration. FPI improves liquidity and lowers the cost of capital.

No fast-growing economy has scaled to middle-income prosperity without sustained foreign participation. The data tell a sobering story: while India attracted $81 billion in gross FDI in FY25, net FDI collapsed to just $353 million, down 96.5% from $10 billion the prior year. Vietnam secured over $40 billion in net FDI in 2024, and Indonesia became the only G20 emerging economy to report FDI growth.

If global capital hesitates, policymakers must ask why. The answer is rarely tax rates alone. It is friction, complexity and uncertainty. In short, investors ask for predictability first, not incentives.

The reform that matters most

Administrative simplification is the highest-return reform available. Consider the arithmetic: ₹10,000 crore of spending creates a linear impact. But eliminating dozens of approvals and weeks of delay across millions of firms creates compounding gains year after year.

That is how productivity rises, capital flows, and confidence is built. The question is not whether India knows what to do. The question is whether it has the political and bureaucratic will to do it.

The bottom line

For India to unlock its potential, the state must show the courage to do less. At this stage of development, growth does not come from more government. It comes from a simpler government.

Picture India in 2030. One path: incremental improvement with better roads, faster trains and more schemes. GDP grows at 6-7%. FDI stays volatile. We remain a large economy that never quite became a magnet.

The other path looks different. Capital flows steadily because rules are clear and enforcement is predictable. Mid-sized firms scale without compliance paralysis. India becomes the default destination for supply-chain diversification.

The fundamentals are in place. Capital will come. Entrepreneurial energy is palpable. Innovation will scale.

But this will happen on only when the rules are clear, processes are light, and the state trusts its own citizens enough to step back. That is the reform that will matter long after the markets forget this week’s volatility. And that is the choice before India’s policymakers today.