Pankaj Pandey, the head of research at ICICI Securities, expects modest capital expenditure growth in the Union Budget 2026, given the high base of ₹11.2 lakh crore. He believes defense and railways may see increased allocations, but sees limited scope for new measures to boost consumption. In an interview with Mint, Pandey shares his expectations for Budget 2026, early Q3 earnings trends, and how investors should invest amid rising geopolitical risks. Here are edited excerpts of the interview:
What are your key expectations from the Budget 2026? Do you expect increased government capital expenditure?
We expect Budget 2026 to be largely a continuation of the government’s focus on manufacturing, capex, and fiscal prudence, with some additional measures and announcements expected to boost exports amid global trade uncertainty and a tariff logjam.
We expect a modest increase in capital expenditure, given the base is already high (at ₹11.2 lakh crore) and capex has grown at a 20%+ CAGR over FY21-FY25.
However, areas like defense and railways (new high-speed corridors, Vande Bharat trains, Kavaach programs) might see higher allocation.
From a key sectoral perspective, the real estate sector is expected to receive support owing to its 7-8% contribution to GDP, its correlation with other allied industries (such as cement, steel, and building materials), and its status as the second-largest employer after agriculture.
Affordable housing, which has been under stress, may get relief measures such as expanding the definition of affordable housing in terms of value and unit sizes.
In the metal’s domain, we expect the government to increase budgetary allocation for the mining and processing of rare earth minerals.
The Indian textile sector, the second-largest job-creating industry in the country, which provides employment to nearly 45 million people, is currently reeling under the pressure of high tariffs imposed by the US on Indian textile exports.
Hence, the textile industry is expecting policy measures in the upcoming budget to support textile exports, including relief schemes or tax concessions for setting up new units, and the permanent removal of the11% cotton import duty to reduce cost pressure.
What more can the government do to accelerate consumption? Is there scope for further tweaks in income taxes?
The government has, over the past year, engaged in front-loading, reducing personal income tax rates and rationalizing GST rates to boost consumption.
With limited fiscal room, we don’t expect any new measures to accelerate consumption.
Initial feelers on the ground are positive, with most consumer categories reporting healthy volume growth.
The government’s endeavor over the past few years has also been to transfer individuals to a simplified new personal income tax regime by increasing the exemption limits, rationalizing tax slabs, etc.
Hence, minor tweaks to personal income taxation cannot be ruled out within the broader aim of shifting individuals from the old to the new tax regime.
What themes could dominate the Budget? Can we see increased spending for Defense and AI?
Real estate, capex, defense and textiles could dominate the upcoming budget.
Considering the govt’s focus on modernization of the armed forces, the budget for FY27 is expected to see a 15-20% increase in capital outlay over FY26’s. ₹1.8 lakh crore.
The Defense Ministry is also targeting a total defense capital budget-to-GDP ratio of 0.8% over the next five years (currently0.5% of GDP).
This also implies a 17% CAGR in defense capital outlay over FY25-30 (versus 6% CAGR over FY21-26).
The Indian start-up ecosystem could be another space that receives more government support, given its innovation and employment-generating capabilities.
What is your assessment of the Q3 earnings of IT and private sector banks? Should investors start buying into these sectors, or avoid them at this juncture?
In the IT space, we see early signs of stabilization, despite continued headwinds from US macro uncertainty, tariff risks and geopolitical tensions, as Q3 results so far have reflected early green shoots for the IT sector.
Select pockets of growth emerged across verticals and geographies, with improving deal activity and larger-deal TCV wins indicating better demand visibility than in the previous few quarters.
We also feel that valuations have turned more supportive after a prolonged 1–3-year period of correction and IT services stocks are now trading closer to long-term historical averages, with risk-reward turning favorable for long-term investors.
Current valuations appear to factor in a conservative growth outlook, providing downside protection while offering upside optionality as demand normalises.
We remain selectively positive on the sector, favoring companies with superior growth visibility, strong deal pipelines and execution track records. Large caps offer stability and balance sheet strength, while select mid-caps provide above-industry growth potential.
In the banking space, credit growth has improved to nearly 10–12%, driven by continued traction in the retail and MSME segments, with strong competitive intensity in home and auto loans.
Asset quality remains resilient across segments, with stress in MFIs and unsecured retail largely bottoming out.
Margin sustainability has been aided by deposit repricing, higher CD ratios (up 100–250 bps QoQ) and CRR-related liquidity benefits, though some moderation is possible in Q4FY26 as the recent 25 bps repo cut transmits.
Private sector banks delivered steady operating performance across margins, efficiency and return ratios.
However, earnings for some lenders were volatile due to seasonal agri-related stress, labor code-linked cost provisions, and incremental regulatory provisioning by the central bank, even as underlying business momentum and asset quality trends remain intact.
With supportive valuations and growth visibility, we are positive on both spaces.
Geopolitical risks have increased. How should investors navigate this period of uncertainty?
These are challenging times with markets already jittery over the same.
Since the start of 2026, headline indices are down 4%, with more pain in the small- and mid-cap space.
In these uncertain times, we advise investors to stay invested in companies that offer healthy capital efficiency (RoE and RoCE above 15%), a healthy B/S (debt-to-equity below 1) and growth longevity.
From a near-term perspective, high-export-oriented businesses can be avoided by focusing on domestic-economy stocks.
Indian Economy offers a perfect trilogy of lower inflation, lower bond yields and improving growth, supporting a positive equity outlook going forward.
One should not really SELL in these turbulent times, unless the long-term prospects materially deteriorate of individual businesses.
What are the sectors investors should look at for the medium term?
With sector rotation as the core theme, we expect BFSI, capital goods, IT and real estate to generate alpha this year. These are the sectors at the top of our pegging list.
BFSI: Revival of credit growth, strong asset quality, valuations at historical mean – strong risk reward in PSU banking space.
It: Time to look post-healthy corrections as valuations have hit a floor, and CY26E will see growth bouncing back.
Capital goods: Momentum in new projects/tenders points to strong ordering activity in CY26E.
Real estate: Huge runway of growth as the sector can multiply by 3 times over the next 5 years.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
